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AvaTrade - Advantages in overview
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- Demoaccount possible
- Mobile App for the traders
CFD Broker Comparison
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Trading CFDs involves risks and therefore requires skills, knowledge and understanding of these risks and is not suitable for everyone.
What is CFD Trading?
CFD trading is definitely not a new trend. Margin trading has been around since the beginning of the 1990s when it was established in England. It has since spread to other countries like the German speaking countries where it continues to attract new traders. The most important assets, like shares, raw materials, currencies and indices can all be traded. Due to the high amount of leverage, CFD traders can expect to have a very encouraging chance of getting a return on their investments. However, before you start trading, you’ll first need to get to grips with the important fundamentals of CFDs.
Background and Characteristics of CFDs
CFDs (Contracts for Difference) are different to more traditional financial products due, in part, to their functionality. Trading in securities or raw materials allows traders the chance to earn tangible assets. These assets can then be deposited in a bank or a depot in exchange for a fee. This, however, is not true with CFD trading. When trading with CFDs, traders simply buy Contracts for Difference and speculate solely on the price development of a particular product. Traders can then save money on the fees normally charged by the depot or bank. Contracts for difference are amongst the most well-known financial instruments today and are advantages for a number of reasons. Trading is simple and flexible and can be done through a number of different brokers using their off-market trading platforms. Additionally, and in contrast to more traditional financial instruments, traders can benefit not only from a rise in price (go long) but also from a fall in price (go short). The risk factor, as well as the rate of return, on your investments are somewhat higher than traditional trading with shares, fund assets or ETFs due to the available leverage effects. That means traders can earn large profits from a relatively minimal investment. On the other hand, many inexperienced and new traders underestimate the amount of risk involved.
Legal Aspects of CFDs
CFD trading allows you to trade in different assets and traders can participate in the price development. The real price of the various assets, like shares or raw materials, are then displayed 1:1. Traders can use their broker’s trading platform to trade with CFDs in real time and with just a few mouse clicks. Trading with CFDs is relatively straight forward and it will only take a short time to learn the ropes, which is why CFD trading is particularly suitable for newcomers. Although the prices are directly influenced by the prices on the reference market, the contracts for difference themselves are off-market products. From a legal standpoint, contracts are traded between the broker and the trader. Therefore, the existing rights and obligations are limited to the correct payment based on the price development of each product. There is no obligation to buy or sell. In general, each broker can design their CFDs as they wish. There isn’t one uniform definition or standardised contract specification. Traders, who own shares with CFDs, are excluded from voting and are not entitled to dividends from the corresponding companies.
Advantages and Disadvantages of CFD Trading
There are many benefits to trading with CFDs especially when comparing them to more traditional financial instruments. As a result, more and more people are changing over to CFDs. CFD trading allows traders to earn large profits from minimal investments thanks to its leverage. Traders also only need to deposit a fraction of the invested capital to the broker. CFD trading also allows you to make profits on rising, as well as falling prices. CFDs are also not subject to issuer risk and are regarded as regular deposits to your bank. Your CFDs are additionally protected by deposit protection provisions in case of emergency. However, even though there are a lot of benefits, it should be noted that there are few disadvantages that come with CFD trading. First and foremost, newcomers and beginners should inform themselves extensively about this area before they begin trading. CFD trading is extremely risky and you could potentially make large losses. If there is also a reserve liability, then you could end up losing more money than you initially invested. Various risk management tools are on hand, however, to help reduce the amount of risk involved. In contrast to stock exchange trading, the spreads with CFD are also higher. Supervision and regulations are available but are noticeably weaker than with stock exchange trading. CFDs are also limited when it comes to long-term investments. As traders only deposit a fraction of the transaction value with the broker, this then acts as a quasi-loan. If traders maintain their CFD position for longer than a day, then this incurs additional finance costs. These costs depend on the corresponding asset and the current interest rate.
How Does CFD Trading Work?
Traders, who want to start trading with CFDs, only need to fulfill a few requirements. You don’t need to have extensive prior knowledge of CFDs before you begin trading but any knowledge you do have about trading in shares, raw materials and other assets will be advantageous. This is why CFD trading has enjoyed a particular popularity in recent years amongst newcomers. Traders will normally only need a bit of starting capital, a computer or mobile device and connection to the internet. The most important basis for trading with CFDs is the trading platform. This means you’ll first need to decide on a broker before you can have access to one. Once you’ve made this decision, you’ll need to create a trading account and make your initial deposit. The amount needed for an initial deposit, as well as the trading platform used, varies from broker to broker.
The Trading Platform Plays an Important Role
Trading platforms can be divided into those that are web-based and those that require a software download. The trading platform gives traders access to the different CFDs on offer by the broker. The number of available shares, raw materials, indices and bonds depends, therefore, on the trading platform you are using. CFD trading happens in real-time. Traders are not able to buy CFDs from one broker and sell them to another. The held positions must, instead, be redeemed or terminated by the corresponding provider. Depending on which trading platform is being used, traders can also gain access to additional functions. One of the most useful of these functions is a demo account. This is mainly suitable for beginners who have never traded in CFDs before. The test account is free-to-use and allows traders to trade under realistic conditions without have to invest their own money. This demo account can either be accessed permanently or for a short period of time depending on the broker. Many providers have even developed their own trading platform for mobile devices. Traders can use an app to trade on the move with their smartphone or tablet.
Explaining the Functionality of CFD Trading with a Practical Example
Contracts for Difference do not belong to trading in futures and don’t, therefore, have an expiry date or maturity. CFDs can be held without any temporal limitations. Contracts for Difference were developed by UBS banks in the English capital, London. The bankers were looking for a way to circumvent the British stamp duty on shares. This was payable on every transaction at the time. CFDs allowed banks to trade off-market and as the CFD trading shares were never changed, traders didn’t have to pay any stamp duty. Many different assets can be traded using CFDs and the procedure remains the same even when trading in a different asset. The following example (using shares) shows you exactly how trading with CFDs works in detail.
A company’s share price is quoted on Xetra as being 10 US-Dollar. The same share is then offered to a broker as a CFD. The price on the trading platform is listed the same as the exact value of 10 US-Dollar. In addition, the broker asks for a margin (security provision) of 10% to trade with the CFD. The trader decides on the price rising (to go long) and invests one US-Dollar. As soon as the money has been invested, the contract value of the share will correspond with the real value. If the share price rises by 10%, then the contract value will rise from 10 to 11 US-Dollar. As the trader invested 1 US-Dollar as capital, he receives 100% in this case. If, on the other hand, the share price falls by 10%, then the contract value would go down by 1 US-Dollar. In this case the trader has lost 100%. Due to this leverage effect, traders can earn large profits, as well as suffer heavy losses. The size of the corresponding financial leverage is derived from the security provision given to the broker. It always corresponds with the reciprocal value of the corresponding margin requirement. Some brokers allow traders to determine their own financial leverage, while others allow traders to choose from a selection of different leverage rates.
Traders Benefit from Minimal Fees
CFDs aren’t just structured in a simple way when compared to other trading instruments but they also incur smaller fees. Most brokers will only levy a small order fee, if any. Traders will only need to pay financing costs (for overnight positions), the spread (difference between the buy and sell prices) and the slippage. It’s also possible that the structure of an asset will change shortly before it is purchased or sold. That means that traders who get offered a CFD for 10 US-Dollar could see the same asset valued at 10.05 US-Dollar seconds later. If traders accept the CFD at the higher price without realising, then they will have paid a spillage (price fluctuation).
What Can Be Traded?
Investors, who decide to trade with CFDs, will be able to enjoy a large selection of different trading products. CFDs can be traded using a number of different investment classes. The current assets available include currencies, raw materials, bonds, shares, indices and futures. Traders also have the option to take part in different markets at the same time, while implementing their trading strategies. The diversity of assets is one of the main reasons why CFD trading has become so popular. The exact number of assets available depends on the broker you choose. Most providers, however, will offer the most popular assets. If you’re interested in trading with a particular asset or trading product, then you should check in advance that the broker you’ve chosen offers it. The biggest brokers have a selection of 1,000 to 1,500 assets to choose from. That means every trader should be able to find the right asset for them.
Trading with Indices
Indices and shares are special financial instruments used to display the real value of an asset from a publicly listed company. The S&P 500 is one of the leading indices. This index allows you to see share prices from a number of well-known companies currently being traded on the world’s biggest stock exchange in New York. If a company’s share price rises, then the price on the index S&P 500 will rise. There are also indices for other stock exchanges around the world, such as the German Dax or Japanese NIKKEI. In addition, there are also indices which display the share prices of smaller companies. The selection of indices on offer will depend on the broker you trade with. On average there are normally between 10 and 20 indices to choose from.
Trading with Shares
Trading with shares is particularly popular. Most brokers, therefore, have a large range of shares in their portfolio when it comes to CFD trading. On average you’ll be able to trade in around 1,000 separate shares from a vast range of countries around the world, including shares from the most well-known companies, such as Apple, Google, Facebook, Volkswagen, Bayer, Mercedes and BMW.
Trading with Valuable Metals and Raw Materials
You’ll also be able to trade in a lot of valuable metals, such as gold, platinum and silver. This is also true when it comes to raw materials such as gas, oil, coffee, sugar, corn and rice. The exact number of available assets varies from broker to broker.
Trading with Currency Pairs
Most brokers will also offer a number of currency pairs as tradeable assets. The most popular pairs, which also are important for Forex trading, are available with most CFD brokers. The exact number varies from broker to broker with some offering up to 60. EUR/USD and JPY/USD are amongst the most popular. Due to the sheer number of tradeable currencies, more and more Forex Traders are making the move to CFDs.
Trading with ETFs and Bonds
ETFs are index bonds with special assets. These are bound together with an area or a region. MSCI Germany is one of the most well-known ETFs in Germany. Traders can even trade in European, American or Japanese CFD bonds. Eurex is one of the most well-known government bonds. Compared to other assets, ETFs and government bonds are not so popular and are, therefore, not offered by every broker.
How Current News and Results Influence CFD Trading
It’s normally very important for traders to keep up to date with what’s happening on the market as new results and notifications can influence the price of an asset. Oil is one of the most popular raw materials, as it is strongly influenced by political factors. These factors are easy to follow and help even new traders to speculate correctly. If a new source of oil is discovered, for example, then the supply will increase. This normally then leads to a fall in the price of oil. As a result, most traders would then decide to open a short position (sell). This example clearly shows the benefits of keeping up to date with the market. If a trader hadn’t heard about the new discovery of oil, then they may well have opened a long position (buy) and consequently have lost their capital.
What Should You Watch Out for While Trading with CFDs?
Trading with CFDs is relatively easy to understand. However, there are a few fundamental things which traders needs to know. The implementation of large financial leverages is typical for CFD trading. It’s therefore important to know how margins and financial leverages work in order to be successful in the long-term. In addition, you’ll also be confronted with additional payment liability or margin call from time to time. Therefore, traders should familiarise themselves with these two areas and their potential effects before trading.
This financial leverage aspect of CFDs is also one of the most attractive for traders. It means that traders only have to use a small proportion of their own capital. Traders only have to deposit a minimal security provision when trading, in contrast to directly buying an asset, where the whole sum is needed. This, however, does lead some traders to underestimate the risk involved. Newcomers and inexperienced traders should probably steer clear of the CFD leverage at the beginning, as the financial leverage should mainly be used by those willing to face the high risks involved. The amount of leverage differs from broker to broker. Normally this leverage is between 5:1 and 200:1. Some brokers even allow for a leverage of up to 400:1. This amount, of course, directly influences the profit you can make from CFD trading in conjunction with the margin. 100/margin is used to get a value, known as the leverage, which is then presented in percent. This is also used to calculate loss.
If you, for example, want to invest 10,000 US-Dollar into a share, then you can do this with or without leverage. If you decide to invest directly into the corresponding asset, then you’ll need to invest the full amount of 10,000 US-Dollar. If you instead decide to use a leverage of 10:1, then you’ll only need to finance 100 US-Dollar your own capital. If the share price rises by 10%, then you would have earned 1,000 US-Dollar profit after selling. This is a profit of 100% using a leverage and 10% when investing directly. CFD trading has both advantages and disadvantages. Traders can profit from minimal procurement costs and capital investment and can even make large profits from minimal amounts. However, the high risk factor should not be overlooked, as you could stand to lose 10,000 US-Dollar or more, in this example, from an investment of 100 US-Dollar.
CFD Margin and Margin Call
CFDs are products with financial leverage. If traders decide to use a leverage, then they are obliged to deposit a margin (security provision) with the broker. Every broker will ask for such a security provision. The amount needed will depend on the corresponding asset and investment amount. Those wanting to trade with indices will find that most margins will be displayed in percent. Raw materials, for example gold or silver, normally have a margin of around 3%, whereas trading in shares normally incurs a margin of 5% on average. If you end up making a loss, then the broker keeps the security provision. It could happen that the security provision may not be sufficient due to the leverage. In this case, brokers will take the remaining amount from your account balance. If that still does not cover the debt, then the broker will ask for a margin call.
How Does the Reserve Liability Work?
A margin call is asked for when the broker requires you to increase your account reserves by depositing fresh capital. The amount of this demand depends on the corresponding level of the initial margin in correlation with the current asset price. Due to the terms and conditions, brokers have the right to close traders’ positions altogether or to reduce them to a suitable amount if the trader has failed to produce the necessary capital. This reserve liability means that traders who speculate incorrectly using leverage can stand to lose a lot of money. By using suitable risk management tools, traders can avoid losing large amounts or being asked for margin calls altogether. Many brokers offer these tools on their trading platform. One of the most popular risk management tools is the ‘Stop Loss’ function. This allows traders to set a limit in case of a drop in value. Once this limit has been reached, then their trading position is automatically sold.
How Can I Find the Right CFD Broker?
CFDs aren’t traded via the stock exchange, but rather on specially developed trading platforms. This means that before you can begin trading, you must first decide on a suitable provider, who will then require you to register for an account. The registration process is free and only takes a few minutes. The popularity of CFD trading has led to a number of brokers entering the market in recent years. This means there are more than 100 different brokers for English-speaking traders to choose from. This large number makes it difficult for newcomers to find the most suitable, professional broker for them. However, there are a number of criteria you can use to help make your decision easier and more informed.
Which Criteria are the Most Important?
Many CFD brokers try very hard to attract new customers by making it as attractive as possible to register an account with them. That means that some will remove commissions from their trades and provide incredible bonuses on deposits. Both of these factors are important but don’t necessarily tell you if the broker is a professional one. In order to do this, it’s important to look at where the broker’s headquarters is. Professional brokers will have an established headquarters in the EU as this requires strict regulation by a reputable supervisory authority and will protect your investments. These important factors are definitely things to consider when making your decision. Those wanting to trade in their native language will want to make sure that the broker provides that service. You’ll also want to make sure that the broker makes their commission rates and spreads, as well as the selection of tradeable assets, transparent and clear to find. Many newcomers will also appreciate minimal required transaction amounts and a demo account. The length of time it takes for questions and queries to be answered by customer support is an additional factor to look out for, as well as the availability of a mobile app for those wanting to trade on the move.
The Broker’s Headquarters and Public Image
You can very quickly find out the broker’s headquarters by looking at their website. Those situated in Germany, the United Kingdom, Switzerland, the Netherlands and Austria are particularly recommendable as those living in these countries will have their money administered in banks separately from the company’s finances. Supervisory authorities, like BaFin (Germany) or the FSA (UK), also ensure that brokers are strictly regulated to increase security. The broker’s official website is a great way for potential customers to find out important information. The way the present their information is a great way to differentiate between professional and amateur brokers. For example, it wouldn’t leave a very good impression if a broker is headquartered in Germany, yet only provides information in English. Customers should be able to find information quickly regarding what type of identification needs to be provided to withdraw money and which withdrawal methods are available. A professional broker will also provide information on how long it takes to process withdrawals and whether there are any limitations.
Minimal Requirements and a Large Selection of Assets
It’s not just advantageous for beginners if there are minimal requirements. A large required initial deposit will put off most customers, as well as a lack of a demo account. The latter can be used in order to test the functionality of the broker’s trading platform without having to risk your own capital. The best test accounts are permanently accessible and equipped with real-time price displays. With CFD trading, the larger the variety of tradable assets available, the better. However, it’s also important that commission rates and spreads are kept to a sensible level. Additional advantages include the ability to access the trading platform through multiple mediums. Many of the most well-known brokers have enabled customers to use their trading platform via an internet browser, software download and a mobile device. This allows traders to always keep up to date with their trades anywhere in the world.
Our CFD Broker Comparison Helps You Make an Informed Decision
Once you’ve decided on your preferences relating to the most important criteria, you can start the rather arduous process of choosing the best broker. First, you’ll want to look up the websites of the various brokers to get an initial picture of how they operate. This process alone could take days before you find the most suitable broker. However, with our CFD broker comparison, both newcomers and experienced traders can find the most optimal CFD broker for them within a few minutes. We have extensively tested the most well-known providers and put them under the microscope. We’ve, of course, taken into consideration all the most important criteria during out investigations. As each trader has their own preferences, we’ve designed our comparisons to be individually adapted allowing each trader to sort the brokers depending on the most important criteria to them. The individually tailored results can then be used to help make an informed decision.