There are many cfd brokers in the market in response to the growing
popularity of the cfd market. Cfd's (contracts for difference) have
arisen in recent years in markets such as the United Kingdom and Australia
that do not have the diverse range of futures products on offer to
the same extent as the United States. Cfd's are a leveraged instrument
that are a contract on an underlying physical product. Traders put
up a margin in much the same way that a futures contract operates.
However, the margin required by cfd companies is sometimes as little
as 1% if the product being traded is an index product.
There can be a difference in product offerings, margin requirements
and platforms provided by cfd brokers. Some brokers do not carry
index based products on domestic or international indices. In other
cases, brokers charge an access fee for the platform they provide
traders including monthly data fees. Account opening requirements
can also differ with some companies running specials that allow
traders to open an account with as little as $1000. Brokers are
also dispersed geographically so the products they offer are often
directly related to the customer base they service.
Another factor to consider is the type of market model being used
by the cfd broker. Presently, there are two different models: the
market maker model and the direct access model. The direct access
model does not involve the imposition of a spread on the prices.
The quotes offered mirror that of the underlying market. In the
case of the market maker model, the company responsible for the
cfd dealing provides a spread between the prices slightly above
or below the physical market. The market maker model can present
challenges for traders during fast markets if prices are requoted
or the bid/ask spread widens considerably.
Many of the cfd brokers offer demo platforms that you can download
to test the functionality of the platform. Sometimes the features
are restricted but you can use the platform to determine how the
market operates.
Exchange traded cfds are a new product that will be appearing in
the Australian market in the months to come. A select group of cfd
brokers have been working with the ASX to integrate this product
into their platform. This product will function in much the same
way as traditional cfd's except that the mechanics of operation
are slightly different since it is traded through a live market
as opposed to a market maker.
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