How to find the best stock trading platform?
There are five important things you need to look at when choosing the best stock trading platform:
1 – Regulation – before opening an account with a broker you need to ensure that the trading platform is authorised by a regulatory regime like the the Financial Conduct Authority (FCA) in the UK
2 – History of the broker – many brokers have appeared in the last few years. You need to understand that this is a very competitive market and many could also disappear very fast. The top brokers have a long history of good service so you should look at this criteria very carefully when selecting a broker.
3 – Choice – the more choice the better. A good broker will normally give clients access to IPOs so that they can trade AIM. In this case the clients will be able to take advantage of penny stocks but also other traditional blue chip stocks.
4 – Availability – the top stock brokers will have a very rich portfolio of shares that can be traded. This will normally include UK and US shares.
5 – Commission and costs – normally the better the broker is the lower the charges will be. Costs will affect your profit line so make sure you will not be overcharged.
What is a stock CFD?
A stock Contract For Difference (CFD) is an agreement between you and the broker in which you will take a position in the market which will depend from the way a stock’s price will move. If the price will move in the direction that you have decided, you will make a profit regardless if that movement is up or down.
The two main differences between the CFD trading and the traditional stock trading are:
1 – You will never own the underlying stock: in this type of trading you will simply make a bet (that you will back financially) on how that particular stock price will move.
2 – By margin trading you can use leverage to improve the returns on the positions you have taken. But as you can imagine this will also increase losses to the same value.
Surely there are a number of advantages of trading with CFDs rather than traditional stocks but you need to consider that there are also some clear disadvantages. In this page we will look at those in more details so that you will have a better idea of what type of trade is in line with your style.
What is a CFD stock broker?
A CFD company is a broker who will act as the other side in your CFD position. Normally they are able to offer a very large range of stocks and other financial instruments like Commodities, Indices, Major currency pairs and others.
Similarly to ordinary stock trading, also CFDs are traded with a spread of prices. This means that when you buy a CFD you pay a price to open (buy) your trade. This price is not the same as the price you pay to close (sell) the trade. Traditional stock brokers do charge commission every time a client buy and sells a stock while with CFD the spread is the cost to pay. This needs to be considered when you do a trade as it will impact the potential profit or loss: the main thing is that until you have covered the spread, you will not have made any money.
What are the best CFD platforms for trading stocks?
Normally CFD brokers offer a great range of instrument in many popular markets but also in many niche markets. Some platforms like Plus500 give access to thousands of markets so there are lots of possibilities to trade. Every broker will also give access to a range of trading platforms and normally they do ask the client to select one of the available ones when they open an account. Those platforms will allow the client to access markets when they are open.
One of the most famous platform is the MT4 platform. There are brokers like AvaTrade for example that will give you a choice between a fixed spread account or a floating spread account. With the floating spread account the spreads are updated in real time for various financial instruments depending on how the market is behaving. It is important that you always consider the size of the spread when picking a CFD broker.
Let’s say that a trader thinks that Barclays shares are going to increase. The trader will therefore decide to ‘go long’ on Barclays and buy the shares at a certain price. The first thing the he will do he will check the spread let’s say on a website of a broker like Plus500. If customers can sell Barclays at 225.7 and buy at 226.1 it means that the spread offered by Plus500 is 0.4. You need to consider that the price must change equal to the spread before any trade can be profitable with a CFD so it is very important to check first what the spread is.
How can you trade stocks with a CFD?
Let’s do an example as it will be easier. Let’s imagine a trader believe that Barclays’ shares are going to fall and make the decision to use a Barclays CFD to open a position and try to bank from a fall in the share price. The first thing that the trader will have to do is to open an account to a CFD broker, like Plus500 or AvaTrade.
The trader will then need to provide the necessary documents and details before making a deposit to start trading. Each broker has different requirement attached to the different CFD instruments and also it will vary depending on which stock you are looking to trade. The margin is anywhere up to 20:1 for CFD stocks: this means that for every £1 that a trade has deposited they can do a contract to buy or sell £20.00 of stock (which is effectively 20 times the amount of their deposit). This is one of the reasons why CFDs are so popular with traders as it give them the opportunity to trade more than their initial account size by using leverage.
As we have seen before tough the risk is really high as if the stock price moves very strongly in the opposite direction, the trader can find himself owning more money to the broker than he has deposited in the account unless you find a broker that offers negative balance protection.
So always remember that when trading with CFDs the cost of your trade will include the spread and normally other fees like overnight financing are generally no commission for a CFD broker.
What are the main advantages of CFD brokers vs traditional brokers?
There are a number of clear advantages when trading with CFD brokers instead of traditional brokers. Below we have summarised some for you:
- Brokers like AvaTrade allows you to trade on margin so you need a lot less initial capital to take a very clear position on a stock
- Profits will be amplified when we use leverage – obviously this is the same as potential losses
- Traders can access global markets from a single platform which is online and has very fast execution
- Commission and fees are not normally charged (the only cost is the spread usually)
- Day traders can benefit from accessing charting and graphing without extra charges
What are the main disadvantages of CFD brokers vs traditional brokers?
Below you will find what are the main disadvantages of CFD brokers vs traditional brokers:
- Margin trading means that all your deposit and more can easily be lost
- You need to be sure about the broker that is a regulated and reputable organisation
- As the commission is included in the spread, traders pay every time they buy and sell
- If the market is not volatile, the amount of profit can be low
- It is so easy that it can be tempting to overtrade
What is the difference between Trading and Investing?
When you are investing in a stock you take a longer-term view of a share performance and you are not so thrilled by the short-term volatility. Investors tend to hold the underlying stock and interested in dividends and also in share price appreciation.
Traders are all short term which allow them to take advantage of market volatility and share trends. They do not own the underlying assets and only take a position for a very short period.
So in summary investors are more interested in the future payout while traders are looking for a payout in the short time: an example of those are the scalpers that are tying to make a profit within minutes of placing a trade.