CFD trading is one of the most popular activities among online traders. CFDs or Contracts of Difference are basically an agreement between two parties. There’s a buyer and a seller and the seller promises to pay the buyer whatever difference there is between the current value of a certain asset and its future value at the time specified in the contract beforehand. What this allows traders is to bet on the price movements of a certain asset without even owning the asset in the first place. So, you don’t need to buy a certain currency in order to profit from its depreciation in value. You can just trade in the corresponding CFD. This is why CFD trading is becoming increasingly more popular and there are new CFD brokers in the UAE and the rest of the world springing up to offer their services to the customers.
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History of CFDs
Before we dive into the CFD trading details in the UAE, let’s first consider the history of these instruments. CFDs were developed by Brian Keelan and Jon Wood from UBS Warburg in the early 1990s. Initially, the purpose of the CFDs was to be used by hedge funds and large institutional investors as a way to hedge exposure to stocks. CFDs were good for this as they didn’t require huge margins. Furthermore, it was much easier to handle the CFDs logistically as no physical shares were involved.
It wasn’t until the late 1990s that the CFD trading was introduced to retail traders as well. This was when CFD trading in the UAE and other places in the world started to grow to the current scale. Gerrard & National Intercommodities was the first company to offer CFD trading to its customers. Back then it was still a new instrument and only innovative and risk-taking platforms were offering them. After IG Markets and CMC Markets also started to adopt CFDs, the instrument became really popular.
Is CFD trading safe?
Much like any other form of trading, CFD trading can be extremely risky too. However, that risk is usually under your control as a trader. You can use leverage to hold more value in your position than you contribute. That means that you can put up $100 and have a position open for $100,000. While your gains in such case are multiplied, you can completely lose out much faster too. So the riskiness of CFD trading can be controlled through leverage. Most CFD brokers in the UAE will have tools that you can use to assess the riskiness and manage it adequately. CFDs, however, remain speculative instruments as many traders around the world use them to speculate on prices of different assets. Although they were designed for hedging purposes, the appeal for speculative trading is too much for many traders not to pick up on. Which is why you may have heard some regulators warn about the dangers of CFD trading.
Benefits of CFD trading
Ability to go short or long
There’s a lot of flexibility CFDs have to offer to the traders. If you’ve found the best CFD brokers in the UAE, you’ll see that you have the ability to go short or long. This means that you can bet for the price of a certain asset to go down or up. When you purchase an asset directly, you are investing in its future value and if its price goes down, so will the value of your holdings. With CFDs, however, you can bet that the price of the asset will go down in the future.
Access to a wide range of markets
It’s easier for brokers to offer CFDs for different markets on one platform. To purchase the assets directly, you would probably have to resort to a few different platforms, but CFDs can give you instant access to more than 16,000 markets from a single website. Since purchasing a CFD follows the underlying market directly, you won’t even feel any difference. For example, if you buy a Microsoft share CFD, it will be just like owning Microsoft share directly, without dividend payments or shareholder privileges. This is why CFD trading in the UAE is so popular and demanded.
Of course, there’s also the benefit CFDs were designed for. You can use these instruments to hedge your portfolio. For example, you might have some shares of Apple in your portfolio and you expect their value to go down in the short term. However, you are planning to hold the shares for a longer period of time. You can use CFDs to open a short position on Apple’s shares, which will offset your losses in case of a downturn.
CFD regulation in the UAE
To be able to enjoy all the benefits offered by CFA trading in the UAE, you have to find the right CFD broker. However, before you start your search, it is best to become acquainted with the regulations that the brokers face in the country. The Central Bank of the UAE is the main regulatory body that oversees the activities of these companies. It, along with the Dubai Financial Services Authority, makes sure that the brokers are complying with the regulations necessary to maintain their operations.
There is a licensing program in place, so when you are looking for a broker, make sure that it has a license to operate in the country. This will save you a huge headache as companies go through meticulous screening procedures in order to obtain the license. This means that the authorities will have already checked the trustworthiness of the platform so that you don’t have to.
The Dubai Financial Services Authority has a register of Forex brokers in the UAE. You can type in the name of the broker you are interested in and you’ll find out within seconds whether the company has a license to operate in the country or not. However, keep in mind that some companies are registered under a different name and carry a different brand name. Find out the name of the company first before you begin this process.
Choosing a CFD broker in the UAE
When you’ve made sure that you are dealing with a regulated broker, you can move on to appraising other criteria to choose the best one out of the list of CFD brokers in the UAE. There are some important things to consider in this process.
Number of markets
The first thing you’ll be interested in is how many markets the broker will give you access to. As we mentioned, this is one of the biggest advantages of trading CFDs. The markets include Forex, commodities, shares, indices, cryptocurrencies, options and other derivatives. The more markets there are, the better your trading experience will be. Although at the moment you might only be interested in a particular market, you never know how your strategy might change in the future. It’s best that your platform will be able to accommodate your changing need. Otherwise, you either won’t have the capabilities to execute your ideas, or you’ll have to switch a platform.
Most CFD brokers in the UAE will list the markets they give you access to on their websites. Go through this list carefully and make sure that it includes the ones you are interested in. You can also check which markets you can trade outside of trading hours. This will be important or not depending on your trading strategy.
Pricing and fees
It shouldn’t come as a surprise that fees are important in trading. When small percentages are concerned, even a fee that doesn’t sound too scary could affect the profitability of your trading activity. When looking at fees it is important to compare different platforms. You as a user will have a hard time judging the fee of a single platform alone, especially if you don’t have a lot of experience in CFD trading in the UAE.
Number of active clients
This might not feel important at first, but it is a great way to judge a platform. Although it doesn’t say anything, in particular, it is a general indicator of how good a broker is. More clients there are on a platform, the more resources it will have to offer better promotions, better rates, customer support, and other services. The fact that many people are willing to trade on the platform also speaks about its appeal. Sometimes this information won’t be public, but in most cases, brokers will say how many active accounts they have on their website. Take advantage of this information and factor it into your decision-making process.
Another thing you can look at when choosing the best CFD brokers in the UAE is the history of the company. The longer the broker has been on the market, the easier it is to trust it. If it were a scam or a fraudulent website, it would’ve likely be closed down by now. A broker that has decades of experience on the market, is, in general, a better choice than a new one. However, innovations usually come from small start-ups, so they can’t be written off completely.
Security is without a doubt a huge issue anywhere where online payments and money are concerned. In order to fully trust a broker, you should be sure not only in its good intentions but also in the adequacy of its security measures. When you are looking at licensed CFD brokers in the UAE, you can be a little more confident that you are using a secure platform as the regulators will have done a background check to make sure your personal data and finances are not in grave danger. Otherwise, you can do a little research yourself. You can read user reviews, independent audit reports and check out the past history of the company to see if it has had any breaches in security before.
How to avoid scams?
Much like everywhere on the internet, CFDs are used by fraudulent companies to trick users and steal their money or personal data. It is important that you are aware of a few red flags that should immediately make you suspicious of certain offers made by purported CFD brokers in the UAE. Never go for anything that offers a fixed return or guaranteed payments. CFD trading is a risky and unpredictable business and while there are professionals who conduct technical analysis and can estimate the future movement in the price of assets with some certainty, no one can give you any guarantees for returns. If you encounter an offer that tells you to invest your money and it will pay you back 150% in three months, you can be almost certain that it’s a fraudulent offer.
Fortunately, UAE is taking a tough stance when it comes to such schemes. Only recently the authorities sentenced two people that conducted a Ponzi scheme using a Forex program as a cover to over 500 years in prison. They still managed to attract over 7,000 investors and millions of dollars worth of investments, which shows that the scams can sometimes package themselves as trustworthy companies and manage to deceive a large number of people.
When you think you’ve found the best CFD brokers in the UAE, always double check their regulatory status with the authorities. If you decide to go for a platform that doesn’t have such a license, at least make sure that it is regulated by some other institution somewhere else in the world. Regulators establish some standards that protect you as a customer, and by electing an unlicensed broker, you are refusing these protections.