When you are trading, it is important to keep some things in mind. Most importantly, what are you trading, and what are your thoughts about those assets or instruments? If you can get your thoughts right on that money, trading becomes simple and steady. CFDs vs forex are two financial domains that have a major contribution to the world economy and offering parameters to succeed. Both are running parallel economy, and they are related and connected in many ways. But, likewise, there are distinctions. For example, both come with a high risk of losing and a high risk of earning.
So, CFDs vs Forex are interrelated and also apart.
Some people might find forex and CFDs synonymous, but there’s a crater of a difference between the two. Also, traders may find it difficult to figure out which one suits their potential and why. Therefore, market players should understand that both are essential and useful in their rights at the outset of trading. After that, however, it is for traders to decide which way they want to go. The following article doles out some explanation that can assist you in reaching a finite conclusion.
What is forex trading?
Forex trading is the exchange of currencies and currency pairs in the world of the financial market. Notably, forex is the portmanteau of exchange of different fiat currencies of several nations. It happens when a business person, company, tourist, buyer, manufacturer, or country buys, sells, or exchanges currencies for personal usage. Sometimes it is the necessity that drives them through that. Time is important during these transactions.
The process of changing is swift because volumes are higher. Anyone indulging in it has to be wary of the split seconds effect that it can have on their trades. The average daily transaction of the forex market is USD 6.6 trillion and even more. It is increasing with the economies globally. Thus, the impact is massive. Whatever products we purchase or sell worldwide depends on the value of different currencies.
The value of a currency is impacted due to several reasons, including political, wars, economic conditions, policies, foreign affairs, import and export, employment, and other factors. Today, whatever a country does has an effect on its valuations.
Due to the reach worldwide and usage of currencies in commerce, trade, and finances, it is the biggest liquified market and is the largest one.
What is a Forex market?
A forex market is a place where currencies from across the globe get traded. Millions of traders visit here through online means precisely using brokers like T1Markets, 101investing, Global TradeATF, ABinvesting and others. So if you are focused on your way and know how the cookie crumbles in the FX market, trading becomes easier.
The forex market is present as derivatives and spots. It renders currency swaps, options, futures, and forwards. Thus, it displays plenty of options to sellers and buyers alike.
Market users and participants utilise hedging techniques against the risk of interest rates and international currencies. It does not let them heap over any losses. It also allows them to speculate on geopolitical events and gives them the freedom to take their chances and diversify their portfolio.
Every currency trades against each other depending on the current exchange rates. Thus, there are pairs. One is called the base currency, and the other is the quote currency. For example, GBP/USD, EUR/GBP, EUR/USD etc.
Interestingly, if you are buying any product from a foreign land, then it would mean that you pay them in their currency. For example, if you are a Britisher and want to buy a car from the US, you would pay them in US dollars instead of the British Pound Sterling. This is because there would be an exchange. Thus, as per the current price, currencies will get exchanged. It would mean that the British importer will have to convert the money equivalent to British Pound into US dollars.
Likewise, if a tourist from Austria is travelling to Australia would need to convert the currency from an exchange into Australian dollars. Euro is the prevalent currency in Austria. Thus, the tourist will receive the equivalent amount back. However, there can be some deductions depending on exchanges. So, one has to convert the funds into locally accepted money. That’s the norm worldwide.
Notably, the currency market is open 24*7 and works five days a week and the absence of a central market works in its favour. The electronic way of exchanging is working in favour of traders.
One can hold currency pairs as long as they want to without any inhibitions and wait until the desired exchange price arrives their way against the currency of their choice.
What is leverage in the Forex market?
Leverage is like an elevator, it gives you the potential to pile up your potential promptly. In terms of finances, you borrow money from a broker to invest in the market. That certain amount is X times your actual funds in the account wallet. For example, if your brokerage company offers 1:30 leverage, it means you can buy currencies worth USD 900 if you have USD 30 in your trading account. The 30X amount will be borrowed by you from the broker.
Notably, you require an initial margin to avail that leverage. It is needed to get hold of a huge amount of money as per trading standards. Also, it may depend on a broker.
What is a CFD?
CFD is a portmanteau of a contract for difference. It is a type of derivatives that are used in the financial market for speculating different financial assets and products. When the prices of markets are rising and falling, it gives an opportunity to predict the rates without actively or directly getting involved in the market with funds. You do not have to take ownership of the underlying assets. Plus, get a chance to trade a range of markets using it. A trader can trade several markets using it, including shares, forex, commodities, indices and cryptocurrencies.
What is CFD trading?
Trading CFD means you sign an agreement that you will be sharing the difference of exchange in the price of an asset when entering the market and closing the market. The profit and loss depend solely on how accurately you predict. You do not get to buy or sell the underlying asset here. For getting the forecast correct, you would need a broker that can ensure there is no risk of losing money. For CFDs, Global TradeATF is considered the best. This is the provider you should consider while trading in the market.
CFD trading works in a mysterious way where a trader needs to take a position in an open market on the hike and plunge of an asset’s price. However, it is important to register whether the market is reacting to some outside sources or forces. Also, one must understand the concepts of margin, leverage and going long and short. CFD markets are vast. So, paying attention when you close your positions is essential.
Incidentally, leverage is one concept that is equally important for CFDs vs Forex alike. It can give huge profits when used wisely and can draw flak otherwise. While trading CFDs, one should know the difference between the opening and the closing price in financial markets.
What is leverage in CFDs?
When you are indulging in CFDs using leverage, the exposure of the market becomes larger than life. You are in control of so many different markets and make decisions that you have not had earlier as a trader. You do not have to commit to the full price at the outset and that’s the beauty. You still manage to make huge money. That sounds like magic. However, it requires a deep understanding of the commerce and market.
For instance, you are looking to purchase 1000 shares of Netflix. Normally, you would need the whole amount as a standard practice. However, not everyone has that
Margin in CFDs
If you want to decipher leverage at an advanced level, then trading CFDs using margin is another way. The amount of funds needed to maintain and open a leveraged position is addressed as margin. Interestingly, it represents a fraction of the position’s total size.
You can find two kinds of margins when trading CFDs; a maintenance margin and a deposit margin. A maintenance margin is used when the deposit margin is unable to cover the losses incurred in the financial market and causes a close of trades. On the other hand, a deposit margin is needed to open a position in the market.
In the case of the maintenance margin, you may receive a call or message for the top-up of your broker wallet. However, if you are reluctant to add any fund or do not find enough money for the deposit, then your position gets closed. Also, the losses would be realised soon after and needed to be paid by the user.
Duration of CFD trading
Interestingly, you would not find a fixed expiry date in a CFD contract which is available there in options and spread bets. You close a position by placing trades in the diametrically opposite direction against the one it was opened with. The forward contract on the other hand comes with a fixed expiry and you may call it an exception for traders. Also, it has overnight funding charges applicable on it.
Short and long in CFD trading
In the financial market, a trader has to take positions, that is to stay (long) or exit (short). In simple terms, it means buying and selling assets. Fortunately, through the CFD instrument, you can speculate on the price movement of any asset in either direction, up or down. Going short would mean a trader may incur losses prediction and going long is the indication of profits.
Meanwhile, you can also use or continue with your traditional trading ways. If you have the indication of the prices of an underlying asset going to increase, you can long and earn profits through speculation.
Similarities between CFDs vs forex trading
- The trade execution process of contract for difference and foreign exchange is similar.
- If you want to enter or exit the market, then the method is the same during rising and falling markets.
- You can use the same platforms for executing forex and CFDs. Both require pricing methods and tools like charts for getting the prediction right.
- Interestingly, both offer the feature of trading on over the top counter (OTC). The market runs technologically with all banks connected electronically with a computer network. And there is no physical location for the exchange. Everything happens virtually. Thus, they are immensely safe too.
- The cost of trading that you both in both are spreads. However, in other instruments and assets, you have to pay commissions, charges and other fee structures. Thus, the use would be contrary.
- One of the primary similarities between forex and CFD trade is that they are not entitled to the ownership of the underlying asset to the trader. They do not have the control and are limited to mere speculation. For example, if you buy GBP/USD, it does not mean that one is purchasing pound sterling by selling the US dollar against it. Instead, the trader is only speculating the exchange rates. Similarly, when a trader buys a CFD contract on Nasdaq, the market player is not holding the ownership of stocks on the index Nasdaq, instead, the trader is speculating on its underlying price.
- There’s also an option of overnight swaps rollover available in CFDs and forex.
So, if you see from that lense, it appears CFD and forex are synonymous with each other. But wait, the differences below will blow your mind.
Differences of CFDs vs Forex
- The dissimilar contract covering one of the biggest distinction between both forex and CFD trading. On one hand, the contracts for difference has a diverse form of markets and assets like commodities, cryptocurrencies, stocks, indices and others. However, forex is all about currency trading. The diversification here is in terms of distinguished currencies.
- When you intend to take the high risk of trading CFDs, you get the chance to pick various contracts. They may vary in sizes, currency type and increment value depending on nations and the situations where the contracts originated. However, in forex trading, you either hold one currency to accumulate interests or trade one currency against the other and derive profits through the difference while the exchange. The lot size in the currency exchange is uniform.
- The most precise difference stems from general factors that help you know why CFDs and forex are specified in their strides. Supply and demand, trends, movement of the market, external news can influence the change in CFD trading. Also, using CFD you can trade in the forex. However, vice versa is not possible. On the other hand, the change in the forex market and its prices happen during global and massive events. It includes huge monetary policy changes, recession employment and trade affairs.
- The differences in the prices of CFD trading may differ on the size of a contract being selected by a trader. Variations in the market occur due to the minimum tick size. if you talk about the fundamental side, the fluctuations in the CFD instrument depends completely on the type of market. For instance, when you trade a CFD on indices, the index French CAC or Nasdaq or FTSE100 get influenced by the performance of stocks, profits and other reasons. Whereas, the currencies’ movements largely depend on economic factors that sometimes are beyond the control of several economies.
Both CFD contracts and foreign exchange have great benefits for traders. ETFinance is the provider you should consider while trading in both. If you trade CFDs, using the broker, then all tips and news will get straight away to your ears. Likewise, when you trade forex, the online trading portal will ensure your transactions happen instantly. Also, the exchange rates will be live. Interestingly, differences and similarities are stark in CFDs vs forex, but they are options for trading and that cannot be negated. Thus, choose a good broker and start trading.