CFD Providers

Both CFD broker and a stock broker do the same thing; allow you to trade in stocks. Then why is that CFD brokers are often called CFD providers but stock brokers are never called stock providers

The basic reason is that stock brokers are agents who communicate with the stock exchange on behalf of their clients. CFD providers are principals and counterparty to the trade initiated by you. When traders buy, CFD providers themselves are the sellers. Whereas, traders can buy on a stock exchanges only if there are sellers ready to sell in the market. If there are no sellers, you cannot buy in the stock market. It is another matter that if there are no sellers in the market for the underlying share of a CFD, CFD providers may not offer it to traders for buying unless they are ready to take the risk. This is because they have to hedge their bets in the stock exchange by placing counter trades; if they sell Rio Tinto CFD comprising of 100 shares, they have to buy 100 shares to manage their risk.

CFD providers are a part of a larger over-the-counter market and their activity is not limited to share CFDs. Apart from shares, a typical CFD provider would offer the ability to trade in forex, indices and commodities across global markets.

The CFD market is generally unregulated and it is incumbent on traders, especially beginners to be careful while choosing a CFD provider. Try not to believe those who indulge in aggressive marketing, make unrealistic claims that look too good to be true.