Forex and CFD: What is the Difference?

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Forex and CFD trading

There is not much to explain in terms of what Forex or CDFs mean; Forex stands for Foreign Exchange, and CFD means Contract for Difference. These are the investment options that are most popular amongst traders. They both have desirable benefits, but there is no right answer to which one is better. We are going to explain the differences between the two, and, after that, you can decide better which trade market would suit you best.

Please note, that CFDs are extremely complex instruments and you can lose money when trading. 

THE DIFFERENCE

1. The choice of assets

Commodity Assets

As you might assume, Forex traders only trade with currencies (eight coins make up most of the forex market trading volume, even though they offer up to 70 currencies). However, CFD has a much wider choice of assets you can trade with. This type of trading offers thousands of assets, including currencies (major, minor, and exotic). Because of this, Forex can be easier to grasp than CFDs. CDF traded contracts include not only Forex itself, but equities, commodities, and indices. All of this gives you more significant opportunities when it comes to international trading. Cryptocurrencies have also finally started being of much more interest in the market than they were before.

2. Contract size

If you are trading Forex, the lot-size is standard, and it doesn’t depend on the currency pair you are buying or selling (one lot is 100,000 units of currency). Brokers also offer smaller accounts, which are a fraction of the standard lot. These are the mini, micro, and nano lot sizes, which are 10,000, 1,000, and 100 units of a currency. Brokers will choose mini, micro, and nano lot sizes, so you can quickly start from smaller accounts (which are a tiny part of the standard lot). Mini stands for 10,000, micro for 1,000, and nano for 199 units of currency.

CFDs offer a different type of deal. You can have a standard contract worth 100 ounces if you are trading commodities, but if you are trading equities, then the contract will be one share. This will always depend on what you choose to trade on.

3. What influences which market?

Trading GoldYou would think that everything depends on economic events, which is mainly true, but in the forex industry, we also have to include global events. This can be anything, from a sudden pandemic, to trade wars, to a company selling their shares, or how the law changes, which hugely influences the GDPs of various countries.

The CFD market concentrates its fluctuations on the factors that are influencing the asset that people are trading. This means that, if gold rises, we should see what took place; if a big company did something, or something else has to go down so gold could increase again, and so on. Of course, it must include the supply and demand of the asset.

4. Trading cost

The costs of trading are based on the spread. Here, we can also see the variety of CFDs is compared to Forex, although they are both based on the method mentioned above. CFDs may include payments, additional commissions, and it can all change overnight if something changes about a specific asset.

THE SIMILARITIES

1. You don’t have ownership over (underlying) assets

Both Forex and CFD markets will not grant you ownership of the underlying asset you are trading. Simply put, for the pair of currencies (for ex. EUR/USD) you’re not buying or selling them; you’re trying to guess whether the value of the money will increase or decrease compared to the dollar (which is what you do on the stock market if you are a regular trader).

Something like this is happening when you trade CFDs. Whether you are trading or buying a contract, you do not own the stocks in the FTSE exchange.

2. Execution

The same platform handles the execution of both forex and CFD trades, and they use relatively similar algorithms and pricing methods using similar pricing methods and trading charts. Many banks process both markets.

3. Trading both long and short (high liquidity)

Trading Forex and CFD - both long and short

When it comes to trading, to short means “to sell”, if you think the value will decrease, and to go long means “to buy” if you think it will soon increase. This is an advantage for CFDs when compared to Forex because you can speculate when the price of an underlying asset is decreasing as well.

In a forex market, when a currency is on the rise, you can buy it at a lower price and then sell when it gets higher when you close the trade. When the market is falling, it’s only natural to sell the currency pair and repurchase it at a lower price.

Forex and CFD, what is best in the end?

Like you can see, both Forex and CFDs have their pros and cons. It all depends on what your financial and trading goal is and where you feel more comfortable and knowledgeable. You may choose both if you have lots of experience or learn more about both. Just be sure to be informed enough before diving into any market. You can always be sure to learn it from us and use any additional valid source if you are a serious trader.

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