Just why does the average small trader love CFD providers?
· They provide easy access to an array of financial markets.
· They offer sizeable leverage.
· Accounts can be opened without any KYC requirements.
However, the deal they offer is nowhere near as good as it first appears. And, just like in a normal casino, most leave a great deal lighter than they entered.
Stockbrokers Versus CFD Providers
A stockbroker / broker-dealer will usually have just two fees when purchasing financial assets. And that’s it. These are the spread and the commission, both of which are very low and fair, offering the customer the best chance of profitability in the long term. (Ankorus will be a broker-dealer with a seat on a large and reputable stock exchange, able therefore to secure the cheapest commissions for customers, with assets insured and regularly audited.)
CFD providers, on the other hand, have multiple fees, including spreads, commissions, overnight fees, margin fees, currency conversion fees, withdrawal fees, inactivity fee and account documentation fees.
In case you find that array of fees hard to believe, check out the list of IG’s fees, the largest CFD provider there is (https://www.ig.com/en/charges-and-fees).
Breaking Down CFD Provider Fees
Spreads — Spreads are the difference between the BUY and SELL prices. Spreads matter because the wider they are, the bigger the need for them to move in your favour — just to break even.
Let’s have a look at the crypto spreads on Etoro, a very popular CFD provider.
Crypto Spreads:
BTC = 1.1% Dash = 4.2% ETC = 4.0% ETH = 2.9%
Note: The argument that CFD providers give is that because of poor liquidity, spreads need to be wider. Well, if you check with crypto exchanges, spreads are nearly always <0.5%, so this is just another lame excuse the providers use to charge their customers more.
Share Spreads:
AAPL= $0.09c NOK= $0.03c ZNGA = $0.05 TWTR= $0.09c
Now, you may be thinking “no big deal”. It’s only a few cents more. Well, guess what, broker’s spreads are just $0.01c! If you are trading with leverage, or trading multiple lots, this soon adds up!
Closed Systems — What about reducing the spread? Oh wait, I can’t. CFD providers are closed systems.
What does this mean? Well, brokers will allow you to move financial asset positions over from one broker to another. So if you have 100 Apple shares with “Broker A” you can move those same shares to “Broker B”. That means a good trader will “arb” from one place to another if price is out of line.
With CFD providers, that option doesn’t exist. Nobody can move positions over to another broker, nor bring financial assets into the market.
So, what’s the result of this? You guessed it! Higher spreads for everyone on the CFD platform.
Commission — Usually, CFD providers charge a set percentage of each trade for their commission, unless the figure is below their minimum commission fee. For instance, let’s assume a share is $85 and the minimum commission is $15, you pay a total of $100, which means commission comes out to 15%! Naturally, this encourages traders into larger orders.
Fifteen per cent is an incredible amount. Consider that the average return for US equities over the last 100 years is around 8% per year, to pay 15% in one trade seems absolutely absurd. So in order to reduce commission as a percentage of your trade, you need to trade larger quantities, which means that those who simply want to test out financial markets cannot dabble, as their account will implode in no time.
Commission rates for IG:
Compare this to a good broker. You will pay NO minimum commission, and for most US stocks you will pay in the vicinity of just 0.01% to 0.05% — that’s considerably less. This enables someone who wants to buy just one share the option to do so, without paying the world for the privilege.
Overnight Fee — This is the sneaky fee a regular Joe new to the space won’t even notice. Just like it says, you need to pay a fee for holding your position overnight. It doesn’t cost CFD providers money to keep a position overnight, yet they nearly all CFD houses or FX houses stamp this fee. So why do they do it? Hmmm.
Currency Conversion Fee — So you want to buy some USD denominated stocks with EUR as your account currency? Good brokers will do the swap rates and charge zero commission for that service. CFD providers, on the other hand, will charge anywhere from 0.2% to 1%.
Withdrawal Fee — Want to withdraw from your account and have the funds arrive the same day? Good brokers will wire you the money within hours of the request.
CFD Houses are not so accommodating. Usually you’ll have to wait several days, if you want to withdraw for free. And if you want it the same day, you’ll be charged anywhere from $25 to more than $100!
Inactivity Fee — Haven’t used your account in two years? Well, prepare to get charged anywhere from $10 -$30 — per-day! — until you log back in. That’s typical service with a CFD provider. Brokers realise that customers may just be parking their money, accruing income / interest / dividends etc., which means they don’t charge for inactivity.
Account Documentation Fee — This really kicks people when they’re down! So you want to open an account with a CFD provider and give them your business. Well, once again, you’re going to get charged!
Conclusion
As you can see, CFD providers aren’t the helpful hand they claim to be. Many claim they are helping the under-served by providing the “best” markets to a wide range of customers.
We think they are more akin to casinos. Though, unlike casinos, they come in disguise — wolves in sheep’s clothing — preying on their customers by charging wherever they can.
Additionally, with CFDs, you don’t own the asset you don’t get dividends or voting rights. CFD providers are also not insured. Tellingly, institutions don’t park money there.
Oh, and in the US, they’re completely outlawed.
There’s a reason CFD providers are often referred to as bucket shops. Likewise, there’s a reason no one has heard of a really successful CFD trader. They don’t exist.
Converesely, Ankorus will follow all the best practices as a fully registered broker-dealer, with membership on a large and reputable exchange, securing the cheapest commissions for our customers. Assets purchased and held by Ankorus will be insured and audited on a regular basis.
Ankorus will be a platform for traders, not gamblers.
Ankorus Main Links
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