Of all the different cfd brokers available, almost all fall into 2 general categories - ECNs and Market-Makers. While a novice user may not notice much difference between them, the mechanics behind the scenes are substantially different. These contracts are the most commonly traded CFDs in the market. In this type of contract, the price of the CFD comes from the price of the underlying stock that is the subject of the CFD.
For someone experienced in stock trading, trading stock CFDs will feel exactly the same. However, there are some differences to be aware of. As the name suggests, these types of CFDs are linked to the performance of a specific index. Traders prefer contracts based on the performance of an index because of the high leverage possible, the liquidity and volatility offered by this type of investment.
The most popular indices are the Dow Jones, the NASDAQ, the London Stock Exchange, the Australian Stock Exchange and Japan's Nikkei. Index traders believe that a specific market will rise as a whole. The advantages of index CFDs include high trading volume, low margin, high leverage, low trading costs and access to international markets that would otherwise be difficult or expensive. While commodity trading on an exchange is complicated due to different lot sizes, different exchanges carrying different commodities and expiry dates, the advantage of CFDs is that they reduce the complexity of trading.
DMA brokers are "Direct Market Access" brokers, and are one of the two main types of CFD brokers. CFD brokers offer many of the same types of orders as traditional brokers, including stops, limits and contingent orders, such as one cancels the other and if done. There are excellent CFD brokers, but it is important to research a broker's background before opening an account. In the UK, CFD brokers are regulated by the Financial Conduct Authority (FCA), based in London.
In Switzerland, CFD brokers are under the supervision of the Swiss Financial Market Supervisory Authority. The list of CFD products at Interactive Brokers includes stocks and shares of multiple indices, such as the Dax, as well as currencies, gold and cryptocurrencies such as Bitcoin. Interactive Brokers is also permitted to offer CFD products in the UK, Germany and Japan, among others. CFD brokers make money through commissions, including a margin on spreads and financing, in addition to hedging.
Most CFD brokers usually give their clients the option to enter into contracts for difference on the shares of some of the world's largest companies. However, it should be noted that leverage is a double-edged sword, as brokers calculate both their profit and loss at the full price of their CFD position. For example, under the rules enforced by the Financial Conduct Authority (FCA) in the UK, brokers are expected to carefully assess each client's suitability for CFD trading. In addition, because exchanges are larger than most third-party CFD brokers and are regulated with far more scrutiny than any broker on the planet, the chances of encountering an illegitimate trader or unfair trading conditions are much lower.