A CFD trader must choose a broker according to its special trading needs. The availability of the desired fund methods, the selection of trading platforms and the availability of certain trading assets are important aspects when choosing providers. But what is priority number one is choosing among regulated companies that are able to ensure the safety of the deposited funds. This presentation starts from distinguishing the types of CFD providers and continues with some key tips when you finally must choose a CFD provider.
There are two types of CFD providers available for online traders:
(i) Market Makers or CFD Agents
(ii) Direct market access providers (DMA)
These two different types of CFD providers offer their clients different features and advantages. There are many reasons why you should or you shouldn’t choose one of these two categories of providers.
These two types of CFD providers are characterized by a lot of differences in their trading terms, here are some key points:
Market Makers as the name suggest create a market within a market. When a client places an order they take the exact-sized opposite position in order the trade to be filled. On the other hand DMA brokers fill their client orders using the market’s liquidity and therefore a trade may be filled at several different prices. Market Makers charge re-quotes but DMA brokers don’t. Note that price re-quotes occur when there is no sufficient volume to fill an order.
Market makers are able to cover a wider range of asset classes. The asset index of a Market Maker usually contains 100s of world shares, 100s of Forex pairs, 10s of Indices and 10s of commodities. On the other hand DMA providers offer a considerably smaller range of financial classes and assets.
Comparing the trading cost between these two types of CFD providers gets a little bit complex. In general market makers can offer their clients better pricing as they can add volume from other clients too. From the other hand during news releases Market Makers add high re-quotes to the available prices and news-trading becomes very expensive. DMA brokers constitute a better selection for News-Traders.
Market makers provide usually a great selection of trading platforms including MT4, web-traders, mobile traders etc. Market Makers never charge their clients fees for using their platforms. On the other hand, DMA providers offer modified versions of trading software that is supplied by 3rd parties. Therefore DMA brokers may charge fees to their clients in order to use this out-sourced software versions. Clients who trade heavily usually pay no such fees.
In general Market Makers are larger companies than DMA providers. That means that Market Makers can offer lower margin requirements and better trading terms to their clients. Market Makers are able to offer also bonus promotions to their new customers (welcome bonus, loyalty bonus etc).
Stock-Indices trend very well without the annoying 'market noise' of other financial instruments. That means you can ride a strong trend using high capital leverage and by placing a narrow stop-loss order. The spreads when trading popular indices are considerably tight.
Trading shares is completely different and you should use very limited capital leverage. Do not trade shares intraday.