If we talk about CFD vs Forex, forex trading refers to trade in currencies from all over the world. On the other hand, CFD stands for Contract for Difference, which is a contract between two parties on any trading asset. Both are having many differences but they are profitable for traders, as they can generate higher returns.
What Does CFD Mean?
CFDs are a contract between two parties including a buyer and seller. This is a form of financial derivatives trading and does not involve any physical delivery of securities or goods. In fact, only the difference amount between the opening and closing prices are settled in cash.
Working of CFDs
Contract for differences requires advance level trading strategy and these contracts are mostly used by experienced traders only. These types of contracts allow trade for an extremely short period of time. CFDs are popular with commodities and currencies.
A trade using the CFD trading platform is conducted using the price movement of derivatives and securities. In short, it is a type of price betting between two persons. A bet is made whether the price will fall or rise for a particular commodity.
Traders who are forecasting that the price will face an upward trend will buy a CFD and traders who are forecasting a downward price trend will sell a position. The net difference between the opening and closing price represents the gain or loss of the trader. They are a good medium for making fast profits because they are for shorter periods of time.
Advantages of CFDs
CFDs are risker but the good thing about risk is that it comes with higher profits. Similarly, CFDs can also be profitable and their advantages are:
Contract for differences allows high leverage to traders, which means low capital investment and higher returns. According to the regulations, the current maximum allowed leverage is 3% but it can go up to 50%. However, high leverage also means high risk but the returns are also higher.
No Day Trading
Place trade orders using CFDs does not have any day trading requirements. Traders can opt for day trading if they wish to do the same and with a low capital of $1000 dollars also. It means that the traders are free to trade and have a wide variety of options.
CFDs are purely based on speculation about future trading prices. Financial instruments that are available for trading are currencies, stocks, commodities, indexes, and treasury CFDs. Traders can diversify their funds using these.
CFDs offer products from the global markets including round the clock access to investors. A wide range of products is available for all investors.
No Borrowing for Short Selling
In several markets, there is a rule of borrowing an instrument before short selling of the same. However, CFD trading does not require borrowing an instrument for selling short. These instruments can be shorted without any borrowing costs at any time.
Disadvantages of CFDs
CFD trading also has a few disadvantages that are:
The CFD market is not highly regulated and if you are trading using CFDs then open an account with a trusted broker. Traders should know about the background of the broker before you trade with them.
Advance strategies are required for CFD trading and investors can lose their money while trading in CFDs. In the USA, the use of CFDs is prohibited. CFD traders lose money because of spreads charged on the contracts.
What Is Forex Trading?
The foreign exchange market is the market that operates all the transactions in currencies. This market offers a worldwide reach to the traders and it is the most liquid market in the world. The trades are conducted in currency pairs, which involves buying one currency and selling the other one.
Working of Forex Trading
Forex trading involves many different types of trades that are spot (cash), forwards, options, futures, and currency swaps. At any point where a trader sees profits, the trade can be made. Traders cannot directly deal with the foreign exchange market and because of this, they require a broker.
Forex trading is good for portfolio diversification and can generate potential profits. The forex market is open for a comparatively longer duration that is 24 hours a day and 5 days a week. It has the highest number of traders among all the financial markets. (FX) Forex trading is conducted in currency pairs in which the first currency is the base currency and the second one is the quote currency.
Advantages of Forex Trading
If we are discussing CFD vs forex trading, forex trading also has many benefits that attract traders to invest their money and earn potential returns. The advantages are:
The amount of leverage offered by several brokers is very high in forex trading. In short, traders need small capital investment and they can trade using a higher amount of funds. They can earn profits from the funds that are not owned by them and this can increase their aggregate profits.
24 Hours Accessibility
The forex market is an over-the-counter (OTC) market, which allows direct transaction between two parties through a broker. This market is having the highest operating hours as compared to all other financial markets. It makes trading more convenient for traders.
Low Transaction Costs
Along with a low capital requirement, the forex trading spread charges are also on the lower side. The profits earned by the traders are measured in points in percentage and due to this, the spread charges are also low in forex trading.
The forex market is highly volatile that offers several trading opportunities. The market is highly liquid also, which means that traders can sell their holding quickly in the market. Therefore, traders can earn higher profits while enjoying high liquidity and volatility of the market.
The foreign exchange market is fully regulated by various regulatory bodies operating globally. However, there is no centralised regulatory body but every country has a separate body to monitor the transactions and protect the interest of investors.
Disadvantages of Forex Trading
A few disadvantages associated with forex trading are:
Higher leverage also means that the amount of risk is also on the higher side. If traders can make profits with the funds offered by a broker. Similarly, they can also lose funds if any loss occurs on the leverage amount.
One of the biggest disadvantages of forex trading is that it opens 24 hours. Traders cannot monitor the overnight actions of any market and due to this also many traders lose money in the forex market.
Similarities of Forex and CFD Contracts
After a thorough comparison of CFD vs forex, if we talk about the similarities of CFDs and forex trading. The similarities are:
- Both are offering high leverage for trading.
- Traders can easily enter and exit the market.
- Trading CFDs and forex can be executed with a single broker
- Both are traded electronically using an over-the-counter (OTC) market
- Spreads are charged in both CFD and forex trading
- In both of them, traders don’t have ownership of the asset
Difference Between CFD and Forex
CFD vs Forex trading has a few differences also that are:
- Forex trading only involves currency trading whereas CFD involves instruments such as energy, indices, commodities, and many more.
- Quantity selection in CFD trading depends on the trader. On the other hand, currency trading is carried out in lots of currencies.
- Forex trading is highly regulated and CFD is not regulated by regulatory bodies that make it a risky option.
- The prices of CFDs only changes because of the demand for a commodity whereas currency exchange rates depend on global factors.
101Investing: A Trusted Broker
101Investing is regulated by CySEC (Cyprus Securities and Exchange Commission) and MiFID (Markets in Financial Instruments). Traders can get access to more than 250 CFDs and forex trading along with other options also such as stocks, commodities, metals, and more. All the transactions are protected because it ensures SSL and firewalls for data encryption.
New traders can also opt for a demo account so that they can learn more about trading. A wide variety of educational material is available for traders, which is accessible at any time. It can be used to enhance the skills of traders. Dedicated customer service of 24/5 is also available with this broker.
The trading platform of 101Investing is MT 4, which is highly convenient for traders and can be accessed from the web, desktop, or mobile. The broker does not charge commission on trading and the spread charges depend on the type of transaction made by the trader.
The Bottom Line
In summary of the topic CFD vs Forex, it is concluded that both types of trading have a few similarities and differences. Traders should choose according to their financial goals and risk-bearing capacity. CFD vs forex trading both are offering potential profits to traders.
Traders can trade both with a single broker. In this article also we have discussed a broker, you can compare it with others and then choose the best that fits your requirements. Risk is also attached with both trading options but with CFDs, risks are comparatively higher. Study both types of trading and then select that for which one you should go for.