Explaining CFDs, part 4

We have explained a few things on Contracts for difference (CFDs) so far. We know how they work, their history, and why they are so popular. Whenever you are trading with a CFD, you usually have to go through a broker. Therefore, in this article, we will discuss using brokers with CFDs.

Dealing with brokers on CFDs

When dealing with CFDs, the details of the contracts can be quite tricky. Even though using CFDs simply is not too difficult, the details of the contracts can be. This is why it is best to use a broker when setting up a CFD contract. They can deal with all of the difficult parts.

Brokers also offer additional services with CFDs. They will find someone to trade CFDs with, first of all. Second of all, they allow for people to trade on margin, as we mentioned last time. This means the brokers can offer loans to their clients for their trade.

This comes with a cost, as brokers may necessitate margin calls. There are other costs the clients may have to pay as well, though. After all, how else would the broker make their money?

Usually, with CFDs, brokers do not ask for commission. If they do, it would be rather small. Their main source of income would be their spread. The spread is the difference in price they offer you between your put and call. Basically, they offer you prices that differ from market prices for buying or selling an asset. Although, to be clear, with CFDs you are not really trading an asset. They will then take the difference between what you pay and the real market price.

For CFDs, these can be quite large and make brokers quite a profit. This is why many trade on margin, so the spread will affect them less.

You can either have a fixed or variable spread. Fixed spreads do not move but tend to be larger. Variable spreads tend to be smaller but can become much larger if the trade does not go your way. Therefore, there is more risk with variable spreads.

Conclusion

There you have it then. Brokers are almost essential for tricky CFD contracts, and they offer trading on margin. People still use them despite their sometimes high prices.