CFDs - How to open an account
There’s a lot of choice on offer for new customers opening a CFD account, as well as specific criteria to meet.
Anyone who wants to open a CFD account must first demonstrate the necessary level of experience to handle the extra risks. The CFD provider will assess the situation based on the information submitted with the account application forms and will accordingly classify the client as either a ‘private’ or an ‘intermediate’ customer.
Only those considered as having the depth of trading experience and a good understanding of the product will be categorised as intermediate customers. Such ‘experts’ are entitled to less protection than private customers under FSA regulations and in fact some providers will only operate CFD accounts for intermediate customers.
The minimum sum required to open a CFD account varies between companies. Some will do so for around £2,000, while others prefer to set a higher and perhaps more realistic figure of £10,000. It is possible to deposit funds by a variety of means.
Once an application is accepted and the account opened, the client will receive a password that enables him to log in to his provider’s CFD software. These trading platforms are generally browser-based and operate over a standard internet connection. Live, real-time – usually streaming – prices support one-click instant dealing and update the account with up to the second profit and loss figures, enabling clients instantly to see their account equity, outstanding orders and available margin balance.
Charting packages
The majority of CFD providers bundle in charting and news feeds to their software at no extra cost to clients. The best charting packages run off real-time prices and can be set to different time scales with a choice of indicator overlays. Real-time breaking news feeds allow clients to react as soon as the information comes out. Some providers include fundamental research and technical analysis of the major markets, while others even go as far as giving free access to Level 2 market-depth data, showing the full extent of the SETS order book – data that would normally cost around £50 a month if bought separately.
Until fairly recently, these sophisticated systems were only available on desktop PCs but more providers are now actively upgrading their services to deliver the same features via one of the new generation of mobile phones or pocket PCs.
I’m on the train!
Where available, these mobile services typically replicate all the dealing functions of the website, with one-touch trading on real-time streaming prices. Generally the only real limitation is that not all mobile services support features such as news or charting but the upside to this is that the only cost is the charge for the GPRS network data that is made by, and paid to, the mobile supplier.
Research and development
The majority of CFD accounts are operated on an execution-only basis, with the trading decisions left entirely in the hands of the individual concerned. Most companies will, however, distribute some research to clients, most commonly in the form of a technical analysis report identifying the major support and resistance levels in the key markets. For those wanting more specific trading advice, there are a number of CFD providers that are regulated and authorised by the FSA to operate full advisory services.
Clients who sign up for an advisory service receive professional help and advice to support their trading decisions. Generally this will entail having access to a designated advisor, who understands their investment objectives and level of experience and who, within this framework, is able to make specific trade recommendations – usually on either the major market indices or large cap equities. The advisor may also be charged with keeping clients abreast of significant relevant events such as major economic news or specific company announcements.
Flexible friends
Generally the advice is quite flexible and could, for example, take the form of an email or telephone call. Clients are also free to ring during market hours for advice on any open positions or trades they are considering, including how to get the best entry and exit prices. Most advisory services will even monitor the positions and execute the appropriate limit and stop orders. Alternatively, where the advisor identifies a suitable opportunity, he can take the initiative and call the client to discuss the possible trade.
The aim of an advisory service is to assist the client by providing as much or as little advice as he wants in the form that suits him best. This could be anything from helping him develop a suitable CFD trading strategy to making specific individual recommendations. One issue with these services is that, given the nature of the CFD, the provider is inevitably giving advice in relation to transactions in which it is a party. Because of this, the FSA stipulates certain rules and regulations to manage this conflict of interests.
Advisory services are usually paid for by way of higher commission levels on accepted trades and may be restricted to clients with more substantial funds. Some CFD traders will find this type of arrangement attractive but ultimately it demands a fair degree of trust.
After all, nobody is infallible and any losses fall directly to the client just as they would in an execution-only service.
Dummy runs
Click on to a growing number of online broker websites these days and you will find yourself being offered the chance to undertake a dummy run on the market before plunging into the real thing.
Some brokers call them simulators, some paper trading, some designate them virtual players’ sites, as opposed to the ‘real thing’. Whatever the label, the twinfold aim is the same – to help you ease yourself into trading more slowly than if you hit the button for real and hopefully to persuade you to open an account with the trader when and if you do decide to play for real.
The best simulators incorporate streaming news headlines, charts, trading history and prices, just as if you were trading in the real market – though some data might carry a 15-minute delay. Most are free and open to anybody, including beginners, without the necessity of having to first open an account with the broker. You just click on the button, sign up and you’re away.
Many have time limits – after all, you are using the broker’s facilities without putting any money back into his pockets at this stage. But some can be run indefinitely and can even be used alongside a real account.
A simulator offers the chance for you to familiarise yourself with trading. This not only applies to absolute beginners but to investors who trade in one particular asset but who want to try a new area. They can also be useful for traders who have been out of the market for a while – to get a feel for what’s going on and whether their trading ideas and rationale still work for them before they open an account and commit money to it.
Virtual reality
Dummy runs do have their detractors, however, as well as their fans. Even the supporters warn that they could prove harmful rather than useful if not approached and used in the right way.
It can be argued that dummy runs are of no use because there is a big psychological difference between playing with pretend money and risking your own money for real. Even if this argument is true, it does not follow that the simulator itself is at fault, rather the way that the user approaches it.
The real value of a dummy run lies in people using it as an educational tool to familiarise themselves with both the trader’s platform and with exactly how the market operates before they enter. In this way they might understand its mechanisms and the speed at which it can move against them – of particular importance when trading highly leveraged and complicated derivatives.
If you are going to use a simulator, brokers suggest that you choose one that exactly replicates the real platform, so that when you switch to the real platform no nasty surprises await.
This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements.
The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance.
You should get professional financial advice before making any investment decisions.