The world of financial trading can often be an intimidating place, particularly for those who have little knowledge about it. And using a CFD broker is no different. But how would you know if your CFD broker was ripping you off?
A common practice for beginners is to immediately gravitate towards the big CFD brokers. This is reasonable given a big company is often presumed to be the best option.
However, often the inconvenient truth is that some CFD brokers, both big and small, are completely aware of this gap in a prospective trader’s knowledge, which therefore creates a prime opportunity for them to take advantage of this.
That’s not to say that ALL CFD brokers are trying to rip you off.
There are some that genuinely care about their clients, but it has become increasingly prevalent that a portion of them are ripping you off… and surprise, you probably don’t even know it!
Now don’t be mistaken and think that this is some criminal activity requiring urgent investigation. It is completely 100 per cent legal, because you agreed to it.
It really should come as no surprise, it was right there in front of you, written in black & white and plain English. Not jogging your memory yet? Perhaps it was in their fine print, or maybe their terms and conditions that you agreed to, or even more conveniently, maybe it was buried in a 30-page document deeply hidden on their website.
Of course we are meant to read all of the above, to double-check everything and cross-examine all details, but let’s be honest, is it really reasonable to believe that every single person partakes in this rigorous task?
In a perfect world the answer would be yes, or the answer would be that we trust our CFD brokers enough that we don’t feel the need to interrogate every piece of information provided. But we don’t live in a perfect world, and not everyone is your honest average Joe. And not everyone has a 4 year law degree behind them to understand the legalese often used in the documents.
They’re not directly stealing from your account, not in conventional terms anyway. They are however, charging you excessive fees, transaction costs and commissions, and potentially, decreasing your profits.
Is Your CFD Broker Ripping You Off? 3 Aspects To Consider;
Despite all of this, there is surprisingly a silver lining. The great thing about CFD brokers is that you are not forced to stay with them. We now live in a world where as consumers, we are provided with more options than ever before. And although it may seem as though the world of CFD brokers is saturated by schemes, fine print and sleazy salesmen, there is actually a way to navigate your way through it all.
By the end of reading this, and following the guideline outlined, you will be able to successfully identify whether or not your CFD broker is ripping you off. And for some, it may be quite surprising!
1. Unnecessary Fees
CFD Brokers have been known to be particularly well-skilled at adding on additional, unnecessary fees. Unfortunately, they are also quite good at adding these fees to your brokerage charges without you actually knowing anything about it. But not to fear, you can catch on to their sneaky ways! Here are the hidden costs to look out for;
Inactivity fees are one of the most common ways CFD brokers manage to earn a little extra cash. An inactivity fee will often be charged if there has been no activity occurring on your account for a specified period of time. Once the inactivity has passed the brokers time frame, you will begin to be charged an inactivity fee on a monthly basis. This often occurs when traders open an account, deposit funds, and then simply forget it’s there. Don’t give your CFD broker free money!
Account Maintenance/Keeping Fees
The account maintenance fees are charges that a client may be subject to for simply just having an open account. These charges will be automatically deducted from your account funds and will typically be charged on a monthly or annual basis. Brokers often have a number of requirements that need to be satisfied in order to get this fee waived.
Trading Software, Platform & Live Data Fees
Trading software, platform and exchange data fees will typically be charged if the client has not fulfilled the requirements stated by the broker and may be charged for utilising the platform and data provided by your CFD broker as well as the trading software. These requirements are usually comprised of a minimum number of contracts that need to be fulfilled by the client in order to have the fee waived.
Further Unnecessary and Avoidable Fees Include;
- Trading stop loss/limit order fees
- Phone trading order fees
- Posted paper statement fees
- Posted trade confirmation fees
- Account closure fees
- Email/SMS alert fees
- Bank cheque fees
2. Spread Only Brokerage, Rather Than Commission
Often traditional CFD brokers charge their fees through dealing commissions, however sometimes other brokers take a different approach whereby they offer spread-only brokerage. This can often be an enticing bonus for traders as they mistakenly believe that trading without transaction costs is an advantage. In reality what sounds like a bargain, is often not at all.
No matter what broker you deal with, or what type of trader you are, you will always, be subject to transaction costs. Every time you enter into a trade, you will have to pay for either the commission or the spread. To avoid being ripped off by your CFD broker, it’s important for you to evaluate whether commission-based brokering or spread-based charges will be the best value for money.
The first question that needs to be asked is whether the CFD being traded is reflecting the exchange price, or is there a ‘spread’ being added to the price? For example, if 1 cent is added to the buy price, and 1 cent is taken from the sell price, it can often add up to a total that is much more than what you would be charged for just the commission.
Let’s look at this Commission vs Spread example;
Let’s say you buy 10,000 share CFDs at $0.50.
Commission: TradeDirect365 commission and underlying share CFD price:
Say a share CFD is trading at $0.49 sell and $0.50 buy with a commission of $5.00 that reflects the underlying exchange price. If the share CFD moves up to $0.59 sell and $0.60 buy, the profit would be 10,000 x 9 cents (i.e. $0.59 sell – $0.50 buy), less commission of $10 ($5.00 x 2) = $890.00
Spread: CFD broker that adds 1 cent spread on the buy and sell with no commission:
Looking at the same share CFD but with added spread and no commission, you’d find a $0.48 sell and $0.51 buy. If the underlying share moves up to $0.58 sell and $0.61 buy. The profit would be only $800 with no commission charges.
The trader who trades the spread rather than commission would be worse off by $90.00 on a single trade. They would also be worse off by a similar amount if the trade was a loss. If you extrapolate this out over a year, you can see how quickly your trading costs can eat into not only your profits, but also your trading capital.
It is imperative to keep your trading costs low if you wish to be a successful trader. It’s crucial you actively examine what you would actually be charged on your trades, rather than just complying with what is advertised by CFD brokers.
3. Risk of Client Funds
Although risking client funds does not directly translate into being ‘ripped off’ by your CFD broker, it can potentially pose a huge threat to your account and the funds held within it. There have been numerous previous occurrences where CFD brokers have been caught using their clients’ funds for investment ventures that have not been agreed upon by the client, and are not in the best interest of them.
A notable example of this, was the failure of MF Global, which saw the firm jeopardise $342 million of Australian client funds to trade high risk, leveraged trading positions. MF Global entered into administration following a $6.3 billion bet involving Greek debt that went horribly wrong – a bet funded by client money that was claimed to be held in ‘segregated’ accounts, all without clients’ knowledge.
And as ludicrous as it may seem, there are still a number of brokers that continue to use clients’ funds for hedging purposes. However, we believe that the best and securest way to safeguard client funds is to ensure that this money is fully segregated from the brokering business and are not used for both hedging, or risk investments, but rather held in segregated trust accounts, with top tier Australian banks.
Ask your broker to ensure client funds are held with a reputable bank in a segregated trust account (and therefore, not used for company hedging).
Conclusion: Is Your CFD Broker Ripping You Off?
TradeDirect365 is a CFD broker that is one of the very few providers who isn’t trying to rip off the little guy. We provide an honest, transparent pricing approach that focuses on providing our clients with an easy- to- use platform with the best value for money. Our fees, commissions and spreads are some of (if not) the best in the business, and we’ve got nothing to hide. See it for yourself by viewing our pricing page, but here’s a snapshot;
- Spreads: No added spread for ASX share CFDs
- Stock Trade Commission: From $5 (or 0.07% above $7150 trade value)
- Overnight financing: Long positions 2.5% + RBA rate (currently 1.5% pa). Short positions 2.5% – RBA rate (currently 1.5% pa)
- Inactivity fees: Nil
- Account maintenance/keeping fees: Nil
- Trading software fees: Nil
- Posted paper statement fees: Nil
- Trading stop loss/limit order charges: Nil
- Phone trading order fees: Nil
- Live exchange data fees: $27.50 per month (this is a fee charged by the ASX that we pass on with no extra surcharge added. This is only applicable if you trade ASX share CFDs and is fully rebated if you trade 2 round turn trades (or 4 single legs) of any ASX stock CFD within the calendar month)