Articles of Interest

When trading CFDs it is important to choose the right CFD provider. Generally most people look for the best commission rates, reliable trading platform, and widest product range however there are many other aspects of a CFD provider which you should consider.

Firstly, you should create a checklist of the items to investigate prior to choosing your CFD provider:

1. What markets are CFDs offered on?
Some CFD providers only offer CFDs over ASX listed stocks others offer CFDs over stocks listed on many global exchanges. You need to work out what CFDs you intend to trade in your trading strategy and choose a provider that is able to offer the CFDs you plan to trade.

2. Can my CFD provider offer more than just CFDs?
Some Banks, Brokers and even CFD providers can offer CFDs but many simply ‘white label’ the offering of specialist CFD provider to offer CFDs as an additional product next to shares, futures and options. If you trade multiple products you should consider choosing a CFD provided that can service all of your needs at once, however, if you are only likely to trade CFDs, a specialized provider would better suit your needs.

3. What margins and fees do I pay?
All CFD providers have different margin requirements and fees. Generally CFD providers will charge you fees for the following:

• Holding a Position Overnight (financing)
• Exchange Data
• Transaction Fees (commission)
• Trading Platform
• Negative Account Balances

Many people look at commission charges alone without considering the financing cost that CFD providers charge when holding positions overnight. You should look at all charges holistically and take into account that most CFD providers will not pay you as much interest on your free cash as you would get from a bank. 

4. What platform should I use?
Before choosing a provider you should trial a demonstration of the trading platform that they use. There are many types of trading platforms some are very simple and easy to use, whilst others are difficult and complicated. Each any every trader has their own preference and trading style some prefer platforms with advanced charting packages whilst others prefer simple and easy to use platforms. It is important to be aware that some CFD providers charge for their trading platform, in many cases these CFD providers have outsourced their technology and need to pay a third party. It is also very important to ensure that the platform that you use can offer the order types that your trading strategy requires, some platforms do not offer trailing stop-loss orders and others do not offer if-done orders. You should ensure that the platform you chose is suitable for your trading style and can offer you all of the features that you require. 

5. What range of CFDs should my provider offer?
Aside from shares CFDs are offered over a variety of different instruments including foreign exchange contracts, commodities and indices. Some CFD providers do not offer CFDs on all of these instruments. You should determine whether these instruments form part of your overall trading strategy before choosing a CFD provider as this may be a determining factor.

6. What is a spread?
The spread is the difference between the bid and the ask price, typically spreads are only applied to index and foreign exchange CFDs. Crossing the spread is much the same as a paying commission, this is how CFD providers makes money from their clients trading activity. Spreads can vary from provider to provider, much like commission there is not one standard spread all providers charge.

7. What margins should I pay?
Each CFD provider offers CFDs on different margin rates, these can be as low as 1 percent or up to 100 percent. The margin you pay will vary depending on the liquidity of the underlying instrument over which the CFD is based. You should be aware that margin can work in your benefit or against you. Should you choose a CFD provider that offers low margin rates you should carefully evaluate as to whether you wish to use the full amount of leverage offered to you by you by the CFD provider. Low margins should not be the determining factor in choosing a CFD provider but rather you should consider the product range offered by the provider.

8. How long has the provider been operating for?
You should ensure that your provider is well established and can offer you the customer service that as a new trader you will require. You should call up a few providers and experience their service first hand or even visit their office to see their operations.

In Conclusion
As a new CFD trader it is important to shop around and choose a provider that will best suit your trading style, remember not all providers are created equal. Ask the right questions and chose a provider that can allow you to focus on what is really important, that is your trading! 

To learn more about CFDs you can download our free CFD Guide.

CFD Margin requirements
An initial margin amount is required to open a CFD position, either long or short.  There are two types of margins that are applied to the total value of a CFD position. These are initial margin and variation margin.

Initial Margin
Initial Margin is the initial deposit required to open a position. Generally, for Australian equity CFDs, this ranges from between 5% to 50% of the total notional value of the trade. Hence, if you purchased 10,000 XYZ CFDs at $1.35, you would be required to have at least $1,350 in your account to cover the minimum margin requirement (10% of your total position size of $13,500). The margin requirement for index and foreign exchange CFDs can be as low as 1%.

Variation Margin
Variation Margin is the difference between the initial margin and the margin required to keep the position open as the position value changes. For example if you buy 2,000 XYZ CFDs, at $5.60 it would give you a position value of 2,000 x $5.60 = $11,200. Assuming XYZ is margined at 10% you would need at least $1,120 initial margin to open this position. If XYZ goes down to say, $5.40, you would now have a loss of $400 ($0.20 x 2,000). This loss (known as variation margin) is subtracted from the initial margin of $1,120, leaving a deposit of $720. Since you still hold 2,000 XYZ contracts at $5.40 you have a margin requirement of $1,080 (i.e. 2000 x 5.40 x 10%). There is now a paper loss of $400 and the initial margin has been reduced to $720. This is $360 less than the margin required to keep the position open, which means more margin is needed to top up the account. The shortfall in margin is known as a shortage in equity. If you cannot maintain your margin requirement you will not be able to extend your position however you will always be able to reduce or close a position.

Equity Balances
The equity (or balance) of your account will fluctuate according to the money you have deposited or withdrawn from your account, the profits or losses in your account and the size of the positions held.  During the trading day your account balance, including all open positions, are valued against the prevailing market rate. Therefore your equity balance is constantly calculated in-line or marked-to-market with market movements. Your end of day account balance is calculated using the mid-closing rates (or the last traded price). The equity balance is used to assess your available margin against current positions, and potential new positions you may wish to take. Your cash balance is used to establish if there is a requirement for additional margin deposits on your account. Once a CFD trade is opened, variation margin requirement must always be maintained for your open positions. It is your responsibility to ensure that your account is sufficiently margined at all times, especially during volatile trading periods.  You will only be allowed to trade and maintain open positions on the basis of cleared funds in your account, not on promised funds or funds in transit therefore you must allow sufficient time for funds to clear when depositing money into your account.

If a position goes into profit, the increase in the equity of your account allows for more positions to be opened. 

Shortage in Equity
A shortage in equity occurs when the account balance falls below the required initial margin. Accounts with a shortage in equity are generally only allowed to reduce open positions, until the equity balance is in excess of the required deposit. No new positions can be opened until this situation is rectified.

Margin Calls
If the market moves against you and your equity balance falls below your initial margin you generally have the option to:

i. close one or more of your open position(s), to reduce your initial margin to the required level; and/or

ii. add more money to your account to maintain the initial margin.

This is the first trigger level for margin, referred to as the 'Margin Call', which you must add additional funds to maintain your open positions.

Stop Out Level
You are at risk that your open positions will generally be closed when you have less than 40% of your required initial margin (i.e. 4% of your position size) however this may vary between CFD providers.

Margin, leverage and risk
Margin and the associated leverage can be very useful if you use it correctly. It can also be devastating to the inexperienced trader who has little understanding of the dangers of using leverage without a defined risk management strategy.  There are several ways of using the leverage available by trading CFDs, from the most conservative to the most aggressive. The way in which you use leverage will depend upon your personal circumstances.

Before trading CFDs you should read the Product Disclosure Statement (PDS) that your CFD provider issues as this will explain in detail how your CFD provider deals with margin. 

To understand more about the margin requirements of CFDs and using leverage you can download our free CFD Guide