Traders of today are exposed to a wide variety of trading types and options. They can trade stocks and shares, cryptocurrencies, foreign currency (forex), and contract for difference (CFD). Two of the most widely known trading types are forex and CFDs. But what is the difference between the two, and which is best?
A CFD (Contract for Difference) allows a trader to speculate on a financial market without actually buying, or selling, the underlying asset. When trading a CFD, the trader agrees to exchange the difference in an asset’s price from when the contract is opened and then closed. If the value is higher, the trader keeps the difference. If the value is lower, the trader pays the difference to the broker. One of the main benefits of CFDs is that the trader can speculate on price fluctuations in all directions, rather than just increases.
Forex trading is where different currencies are traded against each other. Buyers and sellers transfer currency between each other at agreed prices and the buyer hopes to profit off these trades due to the increase in the value of a particular currency, against another.
Similarities between the two
Both CFD trading and forex trading do not include the transfer of a physical asset. Instead, they trade over the counter in a decentralised way. The chance to profit is based on the fluctuation of prices, rather than the increased value of an asset that is being held.
Some platforms offer both forex and CFD trading. On these platforms, there is usually the ability to access margin trading. This can be a fixed percentage that the trader deposits, while borrowing the rest from the platform. This allows the trader to leverage the value of their trade and, if successful, reap higher rewards.
Differences between the two
There are a number of differences between forex trading and CFD trading. Notably, CFDs offer more in terms of flexibility by offering more choice of contracts. These come with the option of different currencies and values.
Another key difference is the way prices are determined. In terms of CFDs, the price depends on the supply and demand for the asset that is being traded on. But when it comes to currencies, the price depends on factors including economic indicators, policies, and the amount of currency that is being traded globally.
Furthermore, forex can be traded around the clock, seven days a week. CFDs, on the other hand, can only be traded on when that particular market, asset, or commodity is active.
Which is best?
Concluding which best way to trade, really comes down to personal preference. However, trading in CFDs does present the trader with a much wider selection of assets to trade on.
While forex may be a bit easier for less-experienced traders, getting to grips with CFDs is not hard. If you decide CFD trading is for you, you can check and compare the best CFD trading platforms online to see which is best suited to your needs. Find out costs and fees, who regulates them, minimum deposits, and the types of leverage that is available before you start.
If you want a wide selection of options, being able to trade long or short, and higher margins, then it could be that CFDs are the trading option for you. If you want to start small and limit yourself to just currency, then forex could be the right choice.
Either way, both CFD markets and forex markets are volatile and unpredictable. There is no guarantee of success, and you should be prepared to experience both peaks and troughs in your trading journey.
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.