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CFD brokers

Important: There are 2 types

Page Summary:
There are 2 different kinds of CFD brokers, those that offer Official Stock Exchange dealing prices and those that make their own prices. This page explains why it's important to understand the difference and which one to use.
When it comes to CFD brokers the following is a critical point to understand. There are 2 types of brokers -

  1. Direct Market Access (DMA) brokers, and
  2. Commissions free brokers
Direct Market Brokers (DMA)

If you telephone a traditional stockbroker rather than a CFD broker and buy 1,000 Vodafone shares you'll deal on the official London Stock Exchange price. This price is the same for everyone, small traders and billion pound hedge funds alike.

Direct Market CFD brokers also offer the official London Stock Exchange (LSE) dealing price. So whether you buy the 2,000 BP shares via the cash market or via CFDs you'll be offered and will trade at the same price.

CFD brokers that offer DMA quotes will also do so on any Exchange, whether that be London, Milan or New York etc.

DMA brokers all charge commissions

However, Direct Market Access CFD brokers will all charge a dealing commission usually in the 0.1% - 0.2% range. For example -

  • Buy 1,000 HSBC at £5.00 and the commission will be £5 - £10
  • Note that many brokers will have a minimum commission charge of between £10 - £25 and that can in turn make small CFD trades somewhat expensive
Don't discount the 'cost of trading'

Many people new to trading the markets via products such as CFDs and Spread bets fail to take into account the 'cost of trading' which comprises of -

  1. Commissions, and
  2. The buying and selling

Commissions are self explanatory but can add up if lots of trading is done, especially via day trading.

The buying and selling, usually paying the offer price or selling the bid, is probably more important and costly.

So always take these costs into account and realise that successful trading is as much about controlling your costs as it about forecasting market direction correctly.

Commission free CFD brokers

As the name suggests they charge no commission but the dealing price offered to their clients is set by their own internal market makers.

Now in most cases, especially for the large FTSE 100 stocks, the prices quoted will be the same or extremely close to the official London Stock Exchange (LSE) dealing price. However, there is scope, because of how the market-maker's book is looking, for the prices to be different. For example -

  • The market marker might himself be heavily long HSBC shares and so bids the shares higher than they're currently trading on the LSE in order to try to attract some sellers
  • This will be good news if you're also long but not so good if you're short and are expecting prices to fall

Commission free CFD brokers therefore operate in a similar fashion to the spread betting companies who also make their own markets, based on where the underlying cash market prices are trading.

Which style of CFD broker is the best

Never forget the old and time tested saying from the City of London -

'there's no such thing as a free lunch'

The brokers that offer commission free CFD trading are not doing it from the kindness of their hearts. They will therefore look to make profits at every opportunity. So perhaps the best way to answer the question is to see which model, DMA or commission free, the professional CFD traders use.

The vast majority will use DMA style CFD brokers over commission free ones as they prefer to trade on official market dealing prices rather than a synthetic quote offered by an independent company.

Yes, that means commissions will have to be paid but that will probably work out a better and cheaper investment over the long run.

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