Peter Mathers Articles
Choosing your CFD provider

One of the first and most important things to consider when you're starting to trade CFDs is to know your CFD provider. You only want to be dealing with the most reliable, dependable, trustworthy and service oriented providers who can help you with your trading.

The number of CFD providers is still growing and while this increases the competition in terms of you being able to choose only the best CFD providers it means you have to do your homework. Research and compare all the pros and cons of each CFD provider and choose the one that meets all your requirements.

Know your Provider

Expect changes as new companies come into the picture and existing companies expand their offerings.

Choosing your CFD Provider: Your Checklist

Q: How long has the provider been operating as a CFD provider?
A: You would like a reliable, dependable CFD provider that has a good track record in the industry.

Q: What is the provider's core business?
A: You want to be dealing with people who have expertise in their products and services. Some CFD providers operate as part of a larger fund, investment banking or FX provider. Depending on what you want from your provider, you have to consider if they have the CFD expertise that you need on a wider product offering.

Q: What are the charges?
A: Like dealing with stock brokers to trade physical shares, you will also incur expenses when you trade CFDs. These may include commission (broker fee), the initial margin required and financing charges. Commission may vary from one provider to another and you should consult your CFD provider to check if they offer other commission rates if you're a frequent trader.

Q: How much do I need to open an account?
A: The amount of money you need to open an account may vary from one provider to another. Some require $5,000, others $10,000. There are also providers that offer a credit account that may require more financial and credit checking and proof of your financial stability.

Q: How soon can I open an account and start trading?
A: Opening an account may vary from a few hours to a few days or a week. But with all the credit and financial checks and validating, be prepared for a few days before you can trade.

Q: Does the provider offer discount for volume trades?
A: Some CFD providers may be able to offer discount for big volume or high value trades. It pays to ask your CFD provider what discount arrangements they can offer.

Q: What are the margin requirements?
A: Since the ability to trade on margin is one of the biggest attractions for you to trade CFDs, you should consider the best margin requirements that will bring you the optimum trading exposure. Current margin requirements usually range from 1-10% depending on the share CFD you trade.

Q: How much is the financing charge?
A: When you trade CFDs (on a margin) you are technically borrowing money from your CFD provider, therefore you will be charged what is called 'financing charge' for the total amount of your CFD holding. Most CFD providers use the current cash rate plus a possible 2% or 3% as financing charge, which is computed for as long as you're holding an open CFD position.

Q: What CFDs can I trade?
A: Another advantage of trading CFDs is that it gives you access to other markets outside Australia. Most CFD providers offer Australian and international CFDs, but there are a few that offer CFDs on Australian shares only. Make sure that your provider has a wide range of markets and instruments to trade that will give you access to bigger and more liquid markets with better trading opportunities.

Q: How small is the 'spread' that they offer?
A: Make sure your provider offers the tightest spread for your chosen trade. Spreads will vary depending on the product offered.

Q: Does the provider offer risk management tools, ie stop-loss orders?
A: As will be discussed in more details in a later part of this book, stop-loss orders are useful tools to manage your CFD trade. A stop-loss order is one effective way to minimise potential losses and to protect your profit. Make sure that your chosen CFD provider allows you to place stop-loss orders and change them as your trade progresses with little or no additional charge.

Q: Where does the provider keep client money?
A: Under existing laws governing financial services companies in Australia, CFD providers are required to keep client money in a segregated account.

Q: What happens to your money not allocated to open trades?
A: Some CFD providers pay interest on a certain amount of money on your account as long as they're not allocated to cover any open position. Some CFD providers pay interest if you have $10,000 of free equity in your account.

Types of CFDs

Australian Share, Indices and Sector CFDs
In Australia, most of the CFD providers offer CFDs on the top 500 listed shares. The list is continuously expanding due to demand for other share CFDs and the entry of new providers who may offer specific groups of CFDs not offered by existing providers. Consult your CFD provider for a complete list of tradeable CFDs they offer.

The Australian stock market consists of 12 industry groups called sectors. This grouping is based on an international standard to make it easier to classify companies into their respective industries. Check with your CFD provider if they offer Sector CFDs to make sure that you can trade them if you don't want to do stock specific trading.

International Shares and Indices

Many CFD providers offer CFDs on international shares including US, European, UK and Asian shares. This means you can trade share CFDs on Google, Amazon, Wal-Mart, Honda, Toyota, Vodafone, BMW, Porsche and other big brands that are not available in the Australian market.

An index is a collection of stocks and the corresponding composite value of its components. In Australia, the All Ordinaries (All Ords) is the index which consists of all the publicly listed companies in the Australian Stock Exchange. The closing value of the All Ords changes everyday depending on the price movements of all the shares. Other major indices in the international financial markets include the Dow Jones Industrial Average (USA), Nasdaq (USA), FTSE 100 (UK) CAC 40 (France), DAX (Germany), Nikkei 225 (Japan), Hang Seng (Hong Kong).

Check with your CFD provider if they offer CFDs on international indices because there maybe some good trading opportunities within these indices particularly in times of big uptrends or downtrends.

Trading share CFDs on international shares, sectors and indices offers many advantages including:

  • access to bigger and more liquid markets that offer more trading opportunities than what is available locally
  • low brokerage fee because you don't have to pay the extra administrative charges that you pay to trade physical shares in overseas companies
  • Australia's time zone makes it user friendly if you want to capture some trading action in the UK, US or Asian markets.

First Published: 18 September 2008 - Copyright © Peter Mathers

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