Comparison between CFD and Forex

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Comparison between CFD and Forex

When CFD trading and Forex trading are compared side by side, it has been seen that there are many similarities as well as dissimilarities between the two. In this article, first the similarities will be dealt with followed by the differences.

Similarities between CFD Trading and Forex Trading

The first similarity between these is in the execution process. Entry and exit to both the markets are very easy, no matter whether the market is rising or falling.

Same platform is used for executing both Forex trading as well as CFD trading. In fact, the pricing models and charts used look very similar to each other in both trading. It is important to note that execution of the trades take place in OTC (Over The Counter) market. There are neither any centralized exchanges present nor any physical location for trading both Forex and CFD. The OTC trades take place electronically, through a network of banks.

Another similarity is in the cost associated with trading Forex and CFD. A trader in these segments doesn’t have to pay commission or other financial fees, which are charged in other trading instruments. The only cost of trading is spread.

When it comes to fundamentals of trading, traders in these trading markets don’t actually own the underlying assets.

Let’s elucidate with an example. Suppose a trader in the forex market buys EURAUD. In this transaction, the trader is not actually buying Euros and selling Australian Dollars. What the trader is speculating on is the exchange rate between Euro and Aus $.

Same is the case for CFD contracts too. Let us suppose, a trader has bought a CFD contract on FTSE 100. When he/she takes such a position, the trader does not actually own stocks in the FTSE index. What he/she is doing is simply speculating the movement of price of the underlying asset. It can therefore be easily said that Forex is yet another type of CFD trading.

CFD Trading and Forex – Differences

The first major difference between Forex trading and CFD trading is that in the latter different contract types are involved in different sets of markets, which includes metals, energy, and indices. However, in case of forex, the only thing traded is currency and nothing else.

When you are trading Forex, trading of one currency is involved in exchange of another and the main aspect of trade here is the exchange rate. Type of currency and the increment value differ. Trade of Forex takes place in uniform lot sizes where on the basis of exchange rate one foreign currency is traded against the other.

Another major difference between Forex trading and CFD trading is the factors involved that influence different markets. When trading CFD contracts, a trader has to keep in mind the demand-supply factor of the underlying asset, which has the tendency of changing in accordance with business sectors. In case of Forex trading, global events such as political changes in the international sphere or large scale employment shifts determine exchange rates.

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