Types of Brokers in CFDs Explained
By Frank Barry
For people who want CFDs explained in the fastest way, then it should begin with differentiating the various types of CFD providers. Well, this is because by understanding this, new traders would be able to have a grasp on how a typical transaction would really look like in trading contracts for difference. In other words, they will have an instant understanding on how the systems work. It is in this light that this article will tackle this matter.
In a general sense, there are at least two (2) types of brokers in trading contracts for difference. These are those brokers that have direct market access (DMA) while the other type refers to those brokers that are commissions free. Both of these two (2) will be differentiated in the subsequent parts of this article.
Direct market access (DMA) brokers or intermediaries
On the one hand, direct market access brokers are those that offer trades and positions for the same or unified price. For example, if a trader calls to a traditional stockbroker instead of a CFD broker, then buying 1,000 shares of a specific company will require the buyer to deal in the official price of the London Stock Exchange. The said price will be the same for the rest of the buyers in the market, whether big or small. These direct market brokers will do the same. Hence, if a trader wants to buy shares using the CFDs, then he will then be offered of the same price. Consequently, this also means that the instrument can be traded too at the same price.
Another unique characteristic of these brokers is that they charge commission, which is commonly between 0.1% and 0.2% of the positions. Trader should be very mindful of this because this may have a great impact to their trades, most especially to those small ones. Well, this is because some of these direct market access traders implement the minimum commission charge, which could be from $10 up to as much as $25.
Commission-free Brokers
As its name suggests, this seems to be the opposite of the first type mentioned above. However, this does not necessarily mean that they are cheaper. Well, this is because while they do not charge any commissions from you, the dealing price that they implement is set internally by their market makers.
Hence, there is a higher probability that the dealing price is not the most competitive one.
Nevertheless, there are some instances when the dealing price is close, either a little higher or lower than the price in the London Stock Exchange, to the market average. Aside from these price determination issues, the other mechanics in transacting in CFD trading are the same.
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