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CFDs : Opening an account

"Who is the best CFD broker and where should I open my account" is a question that's often asked.

But there's no right or wrong answer. Some customers are happy with broker A whereas others much prefer broker B, C or D. The best advice I can give is to research the different firms and what they offer.

This is important as one broker might for example be better for very short term traders while another one more suitable for swing traders (trading 5-20 day moves).

If I were going to open a CFD account these are some of the points I'd look into -

  • Direct Market Access - Personally, I would favour CFD brokers that offer direct market access (DMA)

  • Online software - Look at a broker's trading software and how it compares to the other firms - many will offer a free download with delayed prices

  • Commissions - Lower is obviously better and anything above 0.2% per trade (a £10,000 deal would cost £20) is I think too expensive

  • Minimum commissions - Also, do they have a minimum commission level - important if your trades are relatively small as the minimum commission as a percentage of the deal size can turn out to be expensive

  • Financing rates, most brokers charge LIBOR + around 2%, again you always want the cheapest but cheap financing rates are not nearly as important as cheap commissions

  • Dividends - How are dividends handled, some brokers will pay out 100% of any dividend income, others 80%-90% - More information on Dividends and CFDs

  • Customer service - Call up their helpline and see how quickly they answer - quick and efficient is obviously what you're looking for (but in my experience customer service at all the brokers is normally always excellent)
Use internet Message Boards to check out a CFD broker

We humans are notorious for trying to blame someone when things go wrong, even if it's our fault in the first place.

So if you use one of the message boards to check out a broker, and Trade2win.com/boards is in my opinion easily the best (for the UK market) you're likely to see more than a few negative posts about this or that broker.

Chances are the customer will have lost money and is venting his disapproval of the broker who he partly blames. Now, usually this won't be true. So be wary of placing too much trust on any one post, especially negative rants.

A better way of using the message boards is to take your time studying all the posts. Then, you'll get a much better balance of which CFD brokers run good and professional operations and perhaps which ones to avoid.

Message Board Tip

Don't ask the question straight away "which is the best CFD broker" because

a) It's not defined enough, ie best for what - you, me, day trading, US stocks etc, and
b) It will have been asked 101 times in the past

Instead, keep quiet, don't initially post a question, use the search function, then get a cup of coffee, put aside 1-2 hours and get reading. Do that and you're odds on to get the low-down on most of the CFD brokers.

Then, if necessary ask a more specific question.

CFD clients need to be 'professionals' as classed by the FSA

The financial regulator, the FSA, requires all financial brokers to classify their clients depending on many factors including -

  • Age
  • Market knowledge, and
  • General trading experience

This means that all CFD brokers will first make sure you're qualified to trade margined products before you'll be allowed to open an account.

Don't worry, the broker is not going to ask you to sit an exam but they must feel comfortable that you are in turn comfortable with trading a leveraged tool, and more importantly the potential risks involved.

CFD clients will normally always be classed as 'intermediate' which indicates they have previous experience of margined products, perhaps spread bets, options or general stockmarket trading.

What this intermediate classification ultimately means is that if the client were to lose a large amount of money he can't blame the broker for pushing a product that was both unsuitable to him and where he didn't fully understand the risks.

What to do if you need to get experience in margined products

CFDs are not for beginners so the best way to get experience of margined products is with spread bets. Spread bets offer the ability to trade in much smaller amounts of money, perhaps risking no more than £10 - £50 per trade.

So open a spread bet account, fund it with £200 - £500 and then try to trade 2-10+ times a week risking small amounts of money per trade. Then if you lose it won't matter too much as your losses over a period of time should be no more that £100 - £300. Plus, don't discount the benefit of losing money as it's often a great educator.

Then, when you've got the experience of margined products, know how they work and the potential risks you'll be ready to open a CFD account.

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