Choosing the best contract for difference (CFD) provider is similar to choosing a broker. Price, accessibility, reputation and rapport with the provider should be foremost in your considerations. CFDs are offered in several countries, but not in the US. This is due to Securities and Exchange Commission (SEC) rules on trading over-the-counter instruments and other financial derivatives speculatively. A CFD is similar to holding a long position on a stock.
CFD providers allow the investor to purchase a contract on a stock, index, or other market product on a margin—usually 5-10% of the total contract price. If the item increases in value, the investor may then close the contract and pocket the difference. CFD providers may offer positions on commodities, foreign or domestic shares, indices, or treasury products. The fluid nature and wide variety of markets make CFDs perfect for day trading.
Little or no commission is a key selling point of many CFD providers. Providers generally make money off of the spread or the difference between the offer and the bid price of the investment. When a commission is charged, it generally runs less than 1% for both the buying and the selling of the instrument. For example, if you bought a contract for $10,000 US Dollars (USD) and closed it at $11,000 USD, you would pay a total of $21 USD based on a commission rate of 0.1%.
CFDs are usually traded on margin, and the requirements of the provider in this regard will determine the percentage of return. CFD providers typically offer margins of 5%-10%, but some require 20% or more; the higher the margin requirement, the lower the percentage of return will be. For a small investor, this will limit his or her ability to generate larger profits by reducing the amount of the contract.
Accessibility and rapport should be your next consideration. The nature of financial speculation requires that you be able to monitor and execute market actions in real time. Your CFD providers should be able to provide up-to-the-minute information on market activity and news that will affect the future value of the investment.
Finally, the working relationship between yourself and your CFD providers should be natural and complementary. The providers are, in a very real sense, your business partner, and the interaction should be cooperative, not adversarial. The key to this is going to be the trust you have that your providers will be there for you. Putting all these factors together will help to ensure that you are able to find the best provider.
