Looking to trade currencies or CFDs? The first thing you need is to set up a broker account. It might be difficult for a person not having financial background to understand what exactly a broker account is.
This Coinlist guide aims to share a detailed overview about a broker account and other relevant things that might be very useful for novice traders or anyone interested in the field of trading.
Broker Account – Explaining from Beginner’s Perspective
As mentioned before, setting up an account with broker is the first step if YOU – being a retail customer- want to trade assets in financial markets. Opening a broker account is similar to opening a bank account.
How to Open a Broker Account? A Step-by-Step Guide
Commonly the process of opening a broker account can be completed online by filling up an account opening form, usually available at the homepage of broker’s website.
Opening a broker account involves following steps;
- Submitting a basic account opening form
- Verification of identity – this can be done by providing a proof of identification such as national identity card, driving license or any other government document
- Verification of address – this can be done by providing a proof of address such as bank statement, utility bill or any other government document
- Verification of email address – this can be done by clicking the verification link sent by a broker
- Verification of phone number – In some cases, broker might ask for the verification of phone number by sending an SMS or making a computer-operated phone call
Types of Broker
The world of financial trading is divided into several categories such as forex trading, CFD trading, crypto trading, binary options trading, stocks trading and others. Considering various categories of financial trading, brokers also have several categories. Some common types/categories of brokers are defined below;
What is a Cryptocurrency Broker?
A broker dealing with the trading of bitcoin, litecoin, ether, dash and other cryptocurrencies is commonly known as a cryptocurrency broker. It is sometimes called bitcoin broker too. Cryptocurrency brokers charge transaction fee for the trading of each contract.
For example, trading of bitcoins having $10000 worth may be subject to a small bitcoin transaction fee, charged by a broker. It is pertinent to mention here that if you want to buy bitcoin from investment purpose then you should but it directly using blockchain (and not using a bitcoin broker). Purchasing bitcoin without fees is possible when you are using blockchain.
What is a Stock Broker?
A broker dealing with the trading of stocks, bonds or indices is known as a stock broker. Stock brokers charge fixed or variable commission for the trading of every contract.
What is a Forex/Binary Broker?
A broker dealing with forex or binary options trading is known as forex/binary broker. Similar to stock/bitcoin brokers, forex and binary brokers also charge fees for trading. The fee charged by forex/binary brokers can be in the form of commission or spreads.
Examples of Some Leading Brokers
Given below are some of the most trusted and leading brokers from the financial trading industry;
What is CFDs Trading?
Trading CFDs or Contracts for Difference is a popular form of trading that allows traders to speculate on the rising and falling prices of financial assets such as stocks, energies, indices and commodities. Trading CFDs is considered one of the most profitable forms of trading.
Advantages of Trading CFDs
Let’s highlight some key advantages of trading CFDs;
Take Advantage of both Rising & Falling Prices
Trading CFDs is a well-known technique used by traders to diversify their portfolio. It can be used to hedge existing positions in relatively slow-moving assets. With CFDs, you can trade underlying assets in two ways i.e. upward and downward. You can sell an asset if you think its price is about to fall. Alternatively, you can take advantage of expected increase in price by placing a buy trade.
How to Hedge Existing Positions with CFDs?
You can use correlated CFDs to hedge your existing portfolio. For example, we all know that Crude Oil is positively correlated with the Canadian Dollar. The price of Loonie increases with a rise in the crude oil price and vice versa. You can open a short trade in crude oil to hedge your buy trade in the Canadian dollar. Some other examples of similar hedging may be trading Gold and Aussie Dollar as well as trading GBPUSD and FTSE.
Manage Your Capital Effectively with CFDs
CFDs can be traded on margin. It means a trader can trade crude oil with only a handful amount of capital using margin-based trading offered by almost all brokers in the CFDs industry. Trading CFDs on margin is although risky but it can yield high return with minimum amount at stake.
An Example of Margin Based Trading
To buy 20,000 shares of Microsoft, all you need is to deposit only 10% of the total worth of assets. The percentage however can be higher if you are trading CFDs with a CFTC regulated broker. Not to mention, regulations in America do not allow brokers to offer high leverage on CFDs.
CFDs Don’t Expire
Unlike futures, CFDs do not expire which means you can place long term trades without any disruptions as experienced in case of futures.
Frequently Asked Questions