There are numerous brokers to choose from and each with their own advantages and disadvantages. The following list is UK based but many of these will have international sites depending on your location.
The first rule for any broker is that they must be regulated. In the UK this means the broker has to be regulated by the Financial Conduct Authority. You should find the equivalent authority in your country and ensure the broker is registered.
The next question you need to answer is the type of broker you need. This will depend on the answers above as well as how much capital you have to trade.
SB = Spread Betting; C = Contract for Difference; S = Shares; F = Futures; O = Options
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The majority of brokers that offer Spread Betting or CFD accounts cover most markets, although some have much deeper coverage than others. These 2 account types also allow you to trade much smaller positions meaning they are more suited to those with less starting capital. Lets be honest that is the vast majority of us when we start.
When making a decision on the account type I would suggest you read all other pages on this site especially those regarding Order Types, Money Management, Position Sizing and Leverage. These 3 pages will help you to understand the potential exposure you have during trades.
If you have substantial starting capital you may be in a position to open a full futures and options account meaning you are trading the actual futures and options. For this you will need significant capital. The option of using Spread Betting and CFD accounts also remains viable for large accounts and many brokers offer incentives for larger accounts.
If you would like to learn a method to fund your trading account then read our post on generating your starting capital.
The following sections will help you determine which type of broker you should use:
Note : Spread Betting is exclusive to the UK.
What is spread betting?
Spread betting is a derivative product. This means you will not own the underlying asset but instead speculate on the direction you think its price will move. If your prediction is correct, you could make a profit. If your prediction is incorrect, you would make a loss.
The minimum capital requirements for these types of broker is very low and you could (but should not) start trading with less than £100. Nearly all the Spread Betting brokers in the UK have minimum deposit values of between £0 and £250.
Trading AtoZ recommends that you should only open this type of account if you can fund it with at least £3000 (or your local currency equivalent). This will allow you to utilise proper money management and position sizing, whilst allowing for multiple simultaneous positions.
Spread Betting is free from Capital Gains Tax (UK). There is no commission to pay when opening and closing a spread bet. There may be additional costs involved if you hold a position overnight or if the asset you are trading pays a dividend.
CFD (Contract for difference)
The capital requirements for CFD (contract for difference) trading are very similar to Spread Betting as the size of positions you can take is very similar. For this reason, Trading AtoZ also recommends that you should only open this type of account if you can fund it with at least £3000 (or your local currency equivalent).
Unlike Spread Betting, CFD trading is available in most countries. CFD trading is subject to Capital Gains Tax which means a tax could be payable on net profits. CFD accounts typically charge commission on share transactions and use a spread for all other types of transaction.
The capital requirements for a full futures account are far in excess of any other account type mentioned on this page.
As an example, if you wanted to trade a single gold futures contract on NYMEX you would require an initial margin of over $10000. This contract would make or lose you $10 for every $0.10 move in the price of gold. As this page is written gold is currently trading at approximately $1800.
Using what we have learnt from our leverage education and assuming a 4% stop loss ($72) , 3% maximum loss per trade and allowing 10 open positions, we would require an account with $240000.
Trading with real futures contracts will give you much tighter spreads than their spread betting or CFD equivalent but you will have to pay commission to enter and exit your contract. Futures trading is subject to Capital Gains Tax which means a tax could be payable on net profits.
The capital requirements for a full options account varies widely depending on how you want to trade. There are numerous options trading strategies, some of which will require margin similar to futures trading, some requiring a fraction.
Assuming you wanted to trade options with the same contract specifications as futures then you would require an account of a similar size.
Similar to trading futures you will also have to pay commission to enter and exit an options contract. Options trading is subject to Capital Gains Tax which means a tax could be payable on net profits.
This section applies to accounts that are used to purchase shares outright without the use of margin.
The account size here will largely depend on the cost the broker charges for purchasing/selling shares and how many transactions you intend to make each month. Some brokers charge a fixed amount per trade without a monthly fee, whereas some offer lower fixed amounts per trade with a monthly fee.
We can though use the data from the leverage education to come up with a reasonable amount. In that section we calculated that to support 10 positions with leverage of 6 to 1 would require an account of £3000. As standard share accounts do not use leverage we can simply multiply the amount by 6 to arrive at a recommended account size of £18000.