How to choose the right Contract for Difference broker
These days, investors have a plethora of platforms and brokerages to choose from when trading Contract for Difference (CFD). However, it is important to note that not all of them are equal: they range from the cost-effective and user-friendly, to virtual minefields of hidden fees and clunky interfaces. Before you open that account, take note of the following ways to choose the right CFD broker:
Do not be lured by low commissions
A common mistake among new traders is to go for the brokerage that offers the lowest commissions. That’s not a good idea - every brokerage, including the ones that overcharge, know that’s the first thing you look for.
As such, it’s not uncommon for brokerages to advertise abnormally low commissions, only to slap you with ridiculous hidden fees after you’ve signed up. After a year of recurring fees or administrative charges, a low commission brokerage could end up pricier than a regular one.
Beyond that, you should consider the processing methods for orders, and the effectiveness of the interface. These can interfere with smooth trading which may cost you money. Ultimately, low commissions don’t mean anything, if the broker can’t execute your orders properly.
Check the fine print for inactivity fees and period
Many brokerages charge a fee if your account remains inactive for too long. In addition, some brokerages charge ridiculous amounts for inactivity, or set a high bar for what counts as “active”.
For example, a brokerage may charge $30 a month for inactivity. However, scrutiny of the terms may reveal that “inactivity” counts as making fewer than 30 trades a month, or some other improbable high number. Unless that’s actually the way you trade, this “fee” is just an extra $30 a month which you didn’t need to pay.
Established brokerages such as IG charges only a nominal inactivity fee of $25 a month. Even then, you’re only charged if you’ve been inactive for two years or more.
Look for brokers offering optional services with upfront fees
It is important that brokerages are upfront about all their fees. This includes fees which are used to upkeep the online trading platform, provide data, pay for the back-end processing or orders, etc.
While some services are essential, a reliable brokerage will offer them as options, rather than making it mandatory when you sign up. For example, IG offers live data feeds and real time charting tools such as ProRealTime Charts - but the fees are clearly stated, and are refunded if you make a specified number of trades every month. More importantly, these services are optional.
Be wary of brokerages that impose a whole range of fees on you, even for tools you don’t need or use. Some of them have a deceptive “opt-out” system: that is, tools and services are charged to you first, unless you specifically opt-out that you don’t want them. As always, check the terms and conditions before you sign up and make sure you’re only paying for what you use.
Find a brokerage that reacts fast (or smart)
There is always some delay between the time you make an order and the time it arrives at your broker. This is important if you’re not placing a market order. In the space of a few seconds, prices can change significantly and if your brokerage doesn’t have a good way to meet your request, you could end up losing money.
Companies such as IG set up a symmetrical tolerance level on either side of your price. If the price exceeds a certain range when your order is received, the order will be rejected. If the price is lower at the time, then it defaults to the lower price.
For example, you place an order with a requested price of $3. The system sets up a tolerance level, say between $2.90 and $3.10. When your order reaches the broker, the price is $3.17, higher than the $3.10 limit you’ve set. Thus, the order is rejected. If the price is $2.94, then you’ll get it at $2.94 instead of $3. This prevents you from spending more than you have to.
When picking a brokerage, remember that details like these matter. The long-term savings, over multiple trades and several years, are significant.
It’s all about the service quality
Sometimes, things go wrong. It can be a simple mistake - like clicking the wrong button and buying something you don’t want - or as complex as your account getting hacked. In either case, the last thing you want is to be directed to an automated call centre, or go through a dozen “contact us” forms.
And it can get much worse: imagine if you use a brokerage stationed in Hong Kong, and after messing up your order, they don’t answer your calls or emails. Short of spending more money to fly there and getting an answer, the odds of your problem being rectified quickly is very low.
When it comes to brokerages, getting a good return of investment for your spend is more important than the immediate savings from low-cost fees. It’s worth sticking to established brokerages like IG that are transparent with their fees and provide a solid support for your trading needs. And by support, we mean actual people you can talk to over their 24-hour support line at +65 6390 5118. You could even do a face-to-face and speak to their support staff at their storefront office, located at 9 Battery Road, #01-02, MYP Centre, Singapore 049910 from Monday to Friday, 9am to 6pm.
This article was sponsored by IG, the world’s No.1 CFD provider (by revenue excluding FX, 2016). All views, opinions and recommendations expressed in the article are the independent opinion of Go Bear and do not in any way reflect the views, opinions, endorsements or recommendations, of IG Asia Pte Ltd (Co. Reg. No. 20051002K) (“IG”). Information is for educational purposes only and does not constitute any form of investment advice nor an offer or solicitation to invest in any financial instrument. No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material.