Forex is known as the world’s biggest trading market and has always attracted investors from all around the world. But many people who understand the basics of forex don’t even necessarily recognize that there are actually different ways to trade in currency. In fact, there are several. But the two that are most favored by avid traders tend to be straight-up forex trades and contracts for difference (or CFDs).
Here, we’re going to take a look at each of these methods, and the similarities and differences between Forex vs CFD.
This article is an educational post contributed and written by Emanuel J. Lamoreaux a freelance finance writer.
Forex trading in its most fundamental form is actually a great deal like trading stock shares — right down to the fact that both are (wrongly) compared to gambling!
When you make a forex trade, you are buying or selling a pair of currencies that represent one’s value in terms of another. So, buying the EUR/USD (Euro/U.S. dollar) and selling it when it’s higher (meaning the Euro has gained relative value) makes for a profitable trade.
The concept of CFD trading works somewhat similar in that it relates to the value change of a given currency pair. But in this case, you’re not buying or selling the pair as if it were a stock share. Instead, you’re effectively making a wager with the broker that a given pair’s value will rise or fall.
More specifically, you’re agreeing to accept the difference between the value at the end of the contract and the value when you open the CFD. If that difference is in your favor, you earn a return (with that return multiplied by the number of CFD units you purchase).
Naturally, the main similarity between conventional forex trading and CFDs is that both involve assessments of currency values and predictions regarding how currency relationships will shift. In a sense, both methods boil down to the idea of a trader attempting to successfully predict where a given currency’s value is going relative to a specific counterpart.
Another way in which forex trading and CFDs are similar is that neither one involves the trader holding assets. Both kinds of trades are conducted digitally via trading platforms and rely on speculative positions as opposed to actual, physical holdings. In other words, neither option requires that a trader actually obtain physical currency.
Perhaps most importantly though, the two methods are alike in that some of the commonly cited benefits of forex apply to both. Most notably, this means the ability to trade with leverage. This simply means that traders can make transactions with deposits that only amount to smaller percentages of trades. For instance, £10 can be used in a forex account to make £50 worth of trades, and so on.
We covered the main differences between forex and CFD trading in the basic descriptions of both methods above, but there are a few others to be aware of as well.
The most significant is that CFD trading does not adhere to the famous “24/5” model of forex trading (which only means that trades can be made 24 hours a day throughout the work week). CFDs instead are bound by the trading hours of the market relevant to the specific asset at hand.
The other difference is a slight variation in intent. While this is not a universal truth, it’s fair to say that conventional forex trades are made on a short-term basis, with traders often attempting to capitalize on changes in tiny fractions of currency values. By contrast, a CFD by nature establishes a “contract” over a period of time and thus tends to be aimed more at generating value via slightly larger value shifts.
Both of these methods make for fascinating and potentially profitable ways to play the currency market.
That said, both are also challenging, and a thorough understanding of your preferred method is needed before you try any trades yourself.
If you want to receive an invitation to our live webinars, trading ideas, trading strategy, and high-quality forex articles, sign up for our Newsletter.
The5%ers let you trade the company’s capital, You get to take 50% of the profit, we cover the losses. Get your trading evaluated and become a Forex funded account trader.Get Your Forex Funded Trading Account