CFD vs Forex Compared
There are many trading markets available today.
Alongside the Forex market, CFD trading markets have been the choice of many as they offer endless possibilities both in an uptrend or downtrend.
Regardless of this, investors have found it hard to differentiate between Forex trading and CFD trading.
This article presents you with the main differentiations between Forex and CFD trading, including
◉ What exactly the two trading markets are,
◉ The similarities between the two trading markets, and
◉ The specific distinctions between them.
Let’s get right in …
What is CFD trading?
Contracts for distinction trading or CFD trading is simply a form of trading involving a derivative contract between an investor and a broker. Rather than buying an asset, the contract involves an agreement on the asset’s price.
Investors are offered currency flexibility and how much profit they intend to accrue, and trades may be made on either a rise or a fall in price. The profit or loss earned from CFD trading depends on the distinction between the entry and exit prices and how much leverage the trader uses.
When talking about the assets investors deal with through CFD trading, we refer to a wide range of assets. These assets include the shares of companies (equities), commodities like precious metals, indices, and even foreign exchange (Forex). The inclusion of Forex in the CFD trading market brings confusion on how to differentiate it from other assets. But first, what is Forex trading?
What is Forex trading?
Forex trading implements similar principles as general CFD trading but includes some of its own peculiarities. The Forex trading market encompasses speculations on the price of one currency as it measures against another currency. Investors trade on currency pairs and try to make a profit from a rise or fall in the exchange rate between the currencies.
This shift in value is caused by trade flows as well as economic and political factors directly affecting the supply and demand between the currencies. Forex and CFD trading are closely related, and we ask a question to go further. What are the parities between Forex and CFD trading?
Similarities between Forex and CFD trading
Forex is also a CFD trading asset, so you’d expect a barrage of correspondences between the two trading markets. Firstly, both of these make use of brokers that give leverages on trades.
Forex and CFD trading profits are defined by the total distinction between the entry and exit prices, and the same trading platforms even host both. However, in addition to all these is the most apparent likeness of all; dealing with derivatives.
Dealing with derivatives
Forex and CFD trading both involve speculations on the derivatives of assets. However, in place of physically exchanging commodities, these derivative trading methods only focus on the shifts in the price of these commodities. With Forex and CFD trading, investors don’t possess ownership of the assets, and positions may be flexibly exited at any point in time.
Looking at all these, you easily discern that foreign exchange (Forex) trading is only one type of CFD trading. However, as mentioned earlier, there are peculiarities in the forex exchange environment that differentiates it from other CFD assets, and this is what we discuss next.
Differences between Forex trading and CFD trading
The significant difference between Forex trading and every other type of CFD trading is the type of instruments or assets available to investors to pick from.
While Forex trading only involves currencies (or currency pairs), CFD trading generally involves a wide range of assets, including equities and other commodities. Forex trading involves speculations on the prices between 40 to 70 currencies, but CFD trading considers thousands of assets, including these Forex currencies.
CFD trading introduces you to a much wider range of trading opportunities and exposure to other peculiar asset classes. However, even cryptocurrencies are expected to make it into the CFD market, signifying how limited Forex trading is. Nonetheless, there are other distinctions between these two methods.
Factors influencing price
CFD trading factors are general, while Forex trading factors are more specific. Forex prices are primarily affected by worldwide economic and political factors. These factors affect the exchange between two currencies and may include more specific instances like a change in monetary policies, employment shifts, wars, and even environmental factors.
However, when talking about the CFD trading environment, the price change is influenced by factors peculiar to the particular asset traded. For instance, the price of CFD equities is defined by the activities of the company and its predicted profitability over time.
What influences foreign exchange prices may or may not influence other CFD trading assets. Now, we proceed to explain two other distinctions between Forex and CFD trading; the cost of trading and trade size.
Expenses on entering trades
Forex and CFD trading brokers mainly charge investors a percentage of the spread on one trade. However, due to the extended range of CFD assets and some additional trading conditions, investors may accrue other fees.
To give a quick insight, two of these fees are the charges on overnight CFD positions and the commissions on equities when trading the shares of companies. As opposed to what other CFD trading assets may cost you, Forex trading only involves a charge on the spread of your trade.
Minimum trade size
The trade size connotes the units of an asset you may deal with in a single trade. While Forex has general trade size of 100,000 units, CFD trading offers investors a wide range of trade sizes, depending on the asset.
For example, CFD trading equities usually have a regular trade size of one share, while metals like gold and silver have a regular trade size of 100 ounces. It is important to note, however, that Forex brokers give traders the options of 10,000 mini-units, 1000 micro-units, and 100 nano units of currency, helping to reduce the trade size for smaller investors.
Looking at all this, we may place the distinctions between Forex and CFD trading in a table.
|FOREX TRADING||CFD TRADING|
|An asset is only limited to about 70 currencies or currency pairs||Thousands of assets are available to be traded|
|Price is controlled by worldwide economic and political factors||Price fluctuation is caused by a wider range of factors that are peculiar to the asset traded.|
|The cost of trading is limited to a fraction of the spread as charged by the broker||Cost of trading may include other fees like commissions and depending on the asset traded|
|Trade size is usually set at 100,000 units, but brokers help to reduce this to mini, micro, and nano units.||Expected trade size pivots on the asset traded and could go as low as 1 unit.|
Forex trading and CFD trading are very closely related, and it may be difficult to distinguish between them. Nonetheless, distinctions exist, these distinctions cut across very thin lines, and the majority of disparities are based on the peculiarity of each CFD asset.