What is CFD Trading?

CFD means Contract for Difference. With futures, traders can guess how a particular asset’s price will move without actually buying the asset. CFDs give you the option to trade stocks, indices, commodities and even cryptocurrencies. The key to earning profits for traders is by predicting if the asset’s value will increase or decrease.

What is Forex?

In forex trading, people trade different currency pairs. Forex is one of the biggest and most active markets around the world. Making profits from exchange rate fluctuations is what traders strive to do. Every forex transaction includes two currencies, for example, EUR/USD or GBP/JPY which means its focus is on betting on how different currencies will perform.

Market Coverage

A major distinction between CFD and forex trading is the range of markets people can trade. Lot of markets are open to CFD traders, including stocks, commodities, indices and ETFs, among others. Forex traders trade only pairs of currencies.

Looking into leverage and margin is necessary for managing your capital well.
Both CFD and forex trading give traders the ability to manage big-sized positions with only a small amount of capital. Still, the amount of leverage allowed can depend on what is being traded and the regulations in force. Major currency pairs tend to get more leverage from Forex trading than from CFDs.

Liquidity and Trading Hours

It has high levels of liquidity in leading currency pairs and can be done round the clock, five days each week. Trading CFDs requires liquidity which varies with the market you choose. There are plenty of CFDs available 24/7, but traders should know that forex markets usually have higher liquidity, especially once regular trading ends.

Trading Costs

When you trade CFD or forex, you usually have to pay spreads and, from time to time, commissions as well. Although the most common type of forex account is commission-free, the broker charges their fees through the spread. Some CFD brokers will charge a commission when you trade shares. For trading left open overnight, both types of traders will be charged overnight or swap fees.

Holding Assets

When trading forex, people only transact with currency and never own any property. Traders who try CFD trading sign a contract with a broker to trade the change in value of an asset from the time the agreement is made to when it’s finished. You don’t own the asset itself when you invest in derivatives.

Regulatory Environment

Each country’s regulation for CFD and forex trading is not always the same. In several regions, CFDs are tightly controlled or not permitted at all because they are considered extremely risky. Although forex trading is popular around the world, it is overseen by strict rules in numerous places. All traders should make sure they work with brokers who are properly identified by the government.

Uncertainty and Wide Fluctuations

The fact that both CFD and forex trading rely on unpredictable markets and use leverage cause greater risks for traders. Rapid changes in prices on the forex market are usually caused by economic and political news. Just like regular trading, CFDs are risky when dealing with volatile assets such as cryptocurrencies or small stocks.

Which Company Should You Go with?

Whether you choose CFD or forex depends on what you hope to achieve financially, how much risk you want to take and what markets interest you. If you like trading with currencies and need trades to be completed quickly, forex may be your best option. If your goal is to trade in more areas and types of assets, CFD trading is better suited to you.

Conclusion

Although CFD and forex trading may look alike, they are designed for different trade situations and attract different traders. Currencies are the sole focus in forex, while with CFDs you can access many types of global markets. Knowing how each market covers tradeable assets, uses leverage, is regulated and sets costs, will help you choose the best strategy.