Best CFD Brokers 2021

Contract for Difference (CFD) trading has become increasingly popular over the last few decades. Many retail brokers are beginning to offer CFDs to their clients as the demand grows. 

CFD trading appeals to many novice traders, as they can make a profit on both the gains and losses of the underlying instrument. But there are a few key factors to take into consideration before you start to trade CFDs. 

In this article, we’ll take a look at what traders who are new to the world of contract trading should be on the lookout for. We’ll also run through what we think are the best CFD brokers available to traders. Make sure you understand how any trading platform works in depth before committing your money to it.

Our Selection of CFD Trading Platforms 2021

We looked at some of the highest regarded CFD brokers available to make this list. When comparing brokers, we examine aspects such as the fees and commission on trades, customer service, ease of use, and other important factors. 

This is our selection:

• eToro
• IQ Option
• Plus500
• AvaTrade
• XM
• XTB
• Interactive Brokers
• Markets.com
• IG
• FP Markets
• Pepperstone

What is CFD Trading?

CFDs were first traded on the London Stock Exchange in the early 1990s. CFDs were originally utilized by hedge funds and asset managers. The rise of retail trading has brought access to CFD trading to casual traders.

Contracts for Difference are an agreement between a trader and their broker. Traders take out contracts that are connected to an underlying instrument, such as Forex, stocks, or commodities. 

When traders open their position, they speculate that the underlying instrument will either gain or lose value during the contract period – also called “going long” and “going short.”

Regulation surrounding CFDs has been slow to adapt to the growing markets. Some regions, such as the US, Brazil, and Hong Kong, have banned CFD trading outright.

Margin 

Margin is the initial capital that traders invest to secure their position on CFDs. Depending on the leverage ratio, marginal capital is increased proportionally to secure a larger position than the initial amount would have allowed.

If a trader speculated the movement of the CFD incorrectly, they may lose more than the marginal investment.

Leverage

Leverage is the amount by which a broker is willing to increase a trader’s margin to secure their position. 

Leverage is represented as a ratio, for example, 100:1. This means that the marginal investment can be increased to secure a position 100 times larger than its base value.

Local regulations determine the maximum ratios to which margin may be leveraged. Areas where regulation is strict, such as the EU limit leverage to 30:1 depending on the underlying instrument.

Benefits and Drawbacks of CFDs

CFDs are a complicated and volatile market. While it is possible to make large profits using CFDs, it is also equally common that traders make losses. We’ve put together a brief list of the pros and cons of CFD trading.

If you’re looking for more information, skip to the end of this article where we’ve put together an FAQ as well as other important information on the subject.

Pros

• Using leverage can lead to massive profits from a relatively small capital.
• It’s possible to make money from both positive and negative performance of the underlying stock.
• Commission on CFD tends to be lower than traditional trading vehicles.

Cons

• Brokerages charge overnight fees for any contracts that run over a trading day.
• Using leverage for CFD increases the potential loss traders may face.
• Traders do not own the underlying instrument.

How to Pick a CFD Trading Platform?

Regulation

Depending on which country a broker is listed in, it will be subject to different types of regulation. Traders must understand the ins-and-outs of these regulations.

Different regulatory zones may have rules determining maximum leverage amounts. In the UK, EU, and Australia leverage ratios can go as high as 100:1. Elsewhere, leverage maximums are not set.

Regulations will also determine what you’re allowed to trade and whether your funds are kept in segregated accounts.

Fees & Commissions

Platforms such as eToro charge very little for the commission, but they take a proportional cut of each trade. Others take less of a cut, but they charge monthly subscription fees.

You should also be aware of inactivity fees. Since most of these platforms make money from active traders, they penalize users who do not trade frequently.

Platforms like FP Markets that don’t charge any inactivity fees are rare.

Securities Available

Depending on the trading platform that your chosen broker uses, you will have access to a different range of securities.

Because CFD trading is done based on the performance of the underlying security or instrument, the more traders have access to, the more versatile you can be in your strategy.

Brokers like IQ Option and eToro have a wide range of securities on which to trade. Brokers that only offer CFD options, like Plus500, tend to have a more limited selection.

Account Types

Most retail brokers offer different account types to their traders. These accounts differ in terms of their spreads and commissions. With some brokers, higher tiers of accounts have access to more research tools.

When picking a broker, try to find one that allows a demo account. All of the brokers in this list give access to demo accounts.

For most casual traders, standard accounts will suffice their needs. These accounts are typically limited to any account opened with less than a $100,000 deposit, but it changes depending on the broker.

Trading Platforms Available

Many retail brokers use third-party trading platforms to execute trades. The most popular of these platforms are MetaTrader 4 and 5 (MT4/MT5). 

The trading platform that your broker uses will determine which trading instruments you have access to. It will also affect the spreads and commissions you are charged for each trade.

Some brokers, such as IG and Markets.com have proprietary trading platforms. This means that they have set up their own platform through which all trades are executed.

A broker that uses its own platform tends to have lower slippage and a higher degree of accuracy. Smaller platforms may have access to fewer security options.

Customer Support

If a broker is in control of your money, you want to be sure that they are accountable to you. One of the largest concerns of many traders is that their broker has poor customer support.

Many brokers are only reachable through telephone during office hours, Monday to Friday. Depending on where the broker’s offices are, and in which time-zone you reside, this can make communication difficult.

Platforms like AvaTrade have won industry awards regarding their superior customer support. Potential users should ensure that brokers are contactable through email, phone, and online chat.

Example of a CFD Trade

If you think CFD trading is for you, but you’re still unsure of its mechanisms, we’ve put together an example to illustrate how it works.

Unlike other forms of trading where traders own the instrument they are trading, CFDs are contracts to buy or sell based on the speculated increase or decrease of the underlying security.

For example, a trader speculates that Microsoft stock will increase over a 30-day period. They decide to buy 200 contracts at $250 per stock. This trader does not have the $50,000 necessary to secure their position, so they leverage a $5000 margin at 10:1 (10 X 5000).

Hypothetically, over the contract period, Microsoft stocks go from $250 to $260. The trader’s initial position has increased from $50,000 to $52,000. This earns them a $2000 gross profit.

Brokers charge overnight fees calculated daily. In this example, we’ll assume a 6% interest calculated daily overnight.

Net profit will change depending on the commissions that the broker charges, normally between 0.03% and 0.08%. Bear in mind that these commissions are charged on opening and closing positions. This means you must pay the commission fee twice.

The trader’s final profit will equal their profit, minus fees. Assuming they are charged 0.05% in this example, it would work out as follows:

Net Profit = Profit – Opening Commission – Interest – Closing Commission

Net Profit = (52,000-50,000) – (50,000X0.05/100) – (50,000X0.06/365) – (52,000X0.05/100)

Net Profit = 2000 –  25 – 8.21 – 26

Net Profit = $1940.79

CFD vs Investing

CFD trading and investing are two different techniques traders use to speculate on the performance of a particular market.

The main difference between CFD trading and investing is that with CFDs, at no point does the trader own the speculated security. CFDs are simply contracts that speculate on whether a security will trend upwards or downwards over a pre-determined length of time.

Investors own, either in part or in whole, the stock, currency, or commodity they are investing in. This also means that investors can only make money when their investment gains value.

With CFD trading, it is possible to make a profit even when the underlying asset drops in value. This is called “going short.”

CFD vs Spread Betting

CFD trading and Spread Betting are similar in many ways. They are both speculative forms of trading based on the performance of an underlying instrument. They are also both frequently traded using leverage and margins.

Spread Betting is often done through third-party over-the-counter (OTC)  brokerages. The retail brokers on this list do not provide any form of spread betting. Because of their OTC nature, it is possible to place spread bets on company stocks that are not publicly listed.

One of the largest differences between Spread Betting and CFD is that Spread Betting is not seen as an income, and therefore is not subject to capital gains taxes. Spread Bets are also not charged fees and commissions.

Spread Betting is viewed more as a form of gambling. Because of this, it is not suitable for Muslim traders.

Strategies Used For CFD Trading

There is a wide variety of different trading strategies for CFDs. We’ve made a list of the three most popular strategies used in CFD trading. Each of these strategies has a range of different methods and techniques for executing the trades, but the fundamentals remain the same.

Day Trading

Day trading is one of the most popular forms of CFD trading. It refers to traders taking a position for a single trading day. The position is closed at the end of each day.

One of the reasons this strategy is effective is that it mitigates the gapping risk – where overnight news can affect a company’s stocks. This strategy also eliminates overnight charges that brokers charge.

Stocks and shares are the most common instruments used in day trading as they can have large fluctuations within a trading day, unlike commodities.

Swing Trading

Swing traders take advantage of general trends by trying to make trades at the time a market instrument makes a large shift in one direction.

It is generally understood that markets rarely move in a straight line. If an asset or commodity is trending upwards, there will tend to be a large upwards swing as traders quickly start investing.

Swing traders aim to get in on the swing, either upwards or downwards, to capture a large profit over a short period of time.

Scalping

Scalping is a trading strategy that relies on short-term, small but frequent profits. It takes advantage of minor fluctuations in the market over minutes or hours.

Traders will take a position and buy or sell their contracts after small changes in market instruments. Scalpers will rarely, if ever, keep their positions overnight.

Some platforms, like eToro, do not facilitate scalping as the high trade volume puts pressure on their servers. If you plan on utilizing scalping as a strategy, ensure your broker will allow it.

Countries where you can trade CFDs

Most countries allow CFD trading, but there are exceptions. 

CFD trading is illegal in the USA, Brazil, Belgium, and Hong Kong.

Residents in these countries can still trade CFDs, but they have to use brokers who are regulated outside their region. This carries significant risks since these brokers tend to have lower levels of security and trust.

Risks of CFD Trading

As with all forms of trading, CFDs carry their share of risks. Many brokers have risk management tools such as stop-losses and alerts. Traders are encouraged to use these tools to protect themselves against major financial losses.

As a rule of thumb, never put in more than you are willing to lose.

Trading with leverage has its benefits, but there are also significant drawbacks. The recent Gamestop-Reddit saga is an excellent case study in the potential harm of trading with leverage.

Brokers leverage a trader’s initial margin to secure a larger position. Traders earn the profits from their leveraged position, but they could also lose. This means it is possible to make losses that exceed your initial investment.

Traders should be aware that across various platforms, more than two-thirds of traders lose money when trading CFDs. 

Types of CFD brokers

CFD brokers fall into two distinct categories – Dealing Desk (DD) and No Dealing Desk (NDD).

DD brokers are also known as market makers. In a CFD trade, a DD broker takes the other side of a trader’s position.

DD brokers earn their profits when the trader makes a loss, and vice-versa. Many traders see this as a potential conflict of interest. There have been instances in the past where brokers have been caught actively working against their client’s trades.

DD brokers are advantageous in that they offer fixed spreads.

NDD brokers utilize straight-through-processing (STP) to link a trader’s CFD bid to a third-party liquidity provider. Because of this, NDD brokers are not involved in the trade, they only facilitate it.

Many traders feel more comfortable with NDD brokers since they are not party to the trade. They have no interest in whether the trader wins or loses.

Types of accounts

Although brokers may call their account options by any name they wish, there are essentially three different account types to choose from.

Demo Accounts

Demo accounts are an important feature in any trading platform. Traders can utilize demo accounts to experiment with various strategies and markets without risking any real money.

Access to a demo account is a must to any would-be trader.

Standard Accounts

These are entry-level accounts available to most potential traders. Depending on the broker, the minimum deposit to open an account could range anywhere from $0-$500.

The features available to standard account holders will change depending on the brokerage. Some brokers may limit access to research tools and educational resources.

Users with standard accounts tend to pay a higher commission rate on their trades than premium account holders.

Premium Accounts

The amount needed to open a premium account varies depending on the broker, but it tends to be around $10,000.

Premium account holders have access to all the features of their broker’s trading platform. They will often have access to exclusive events and webinars to help them succeed.

Because the positions these account holders take will be larger, they pay lower commission rates for their trades.

How do CFD brokers make money?

CFD brokers make money in two ways.

Firstly, they charge a commission for trades. Brokers will take a percentage of the opening and closing position of every trade. Although this percentage is small (less than 1%), the volume of trades the broker executes every day makes up for it.

A DD broker will make money off of their clients’ losing trades. Because DD brokers take the opposite position of their clients’ CFD, whenever a client wins, they have to pay out. When a client loses, they pay their losses to the broker.

FAQ

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