A word about CFD providers

There’s a common misconception about CFD providers…

And that is the relationship between whether the provider quotes the underlying share prices or not, and your actual costs in CFD trading.

So the commission may be low, but is there a cost because of the spread, that you may not have been aware of before?

Here’s what I mean.

With many CFD brokers, their CFD prices are market-made, that is, with spread widening. This means that the CFD bids and offers are not exactly that of the underlying market, but the spread has been widened. Hence the bid and ask prices are lower and higherthan the actual market.

This effectively means that it’s a cost of CFD trading. (This is where many providers “build in” their commissions”)

How much is the spread widened by? This depends on the CFD provider.

Some will disclose that they are widening the spread by say 0.05% of the underlying price. So you can look at a typical trade and calculate how much this is, and add it to your commission cost if any.

Some providers have a low or zero commission, but the prices are market made, but the amount of spread widening is not explicitly stated. Before you panic, this may not be a problem necessarily. One way to tell is to get a demo account and to watch the prices over the times that you’ll trade.

You may find that say first thing in the morning the spreads are a bit wild, but after that, they may more mirror the underlying market.

So with a bit of detective work, you may find that a certain broker will have good spreads as well as good commissions.

So the costs of trading are really: 1. commissions, 2. spread widening, 3. interest charges and credits, and 4. slippage.

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