CFDs (contracts for difference) are contracts between brokers and traders. They agree to exchange differences between exit and entry prices for a specific underlying asset. The contracts were mainly used in order to speculate on the FOREX market but they are nowadays much more complex. You can trade CFDs for various assets, like oil, metals, and there is a clear growth in the number of CFD traders active in cryptocurrency.
As CFDs are traded, the investor has a huge flexibility as he/she can choose traded currencies and increment values that are used. Loss or profit received by the investors is calculated based on the difference in the exit and entry price. This difference is multiplied by CFD units used.
At first glance, CFD seems really complex and sophisticated. In Forex, we have currencies that are traded against other currencies. This is much more straightforward. As a beginner investor chooses between Forex and CFDs, confusion starts to appear. That is because of the similarities between them. However, the most important thing to understand is that there are differences you should be aware of.
Main Differences Between Forex And CFDs
The differences between Forex and CFDs are numerous and notable. CFDs instantly offer increased flexibility because there are various contract ranges that exist, all with different increment values and currencies. It is this flexibility that attracts many investors, especially those looking for quick gains. The problem is that you can never actually make a lot of money in a really short period of time. The increased flexibility means you will have to deal with both wins and losses.
Another huge difference between CFDs and FOREX is the key price determinants. As an example, CFD price largely depends on demand and supply for a specific underlying asset that is traded. In FOREX, currency value is directly dependent on some fundamental factors. Some examples of these include key economic indicator strengths and policies that are in place. Countless factors can be considered.
It has to be added that the FOREX market is always open for 5 days every single week. Investors can easily get access to the market for trading purposes. CFD trading time will vary based on the underlying asset, commodity or market.
FOREX and CFDs do have similarities but it is the differences we mentioned that sets them apart. You need to understand them so that you can make a well-informed trading decision. Keep in mind that many of the highly experienced traders incorporate both FOREX and CFDs in their current trading strategy. You might want to work towards doing the same thing.
The only thing that has to be added is that both FOREX and CFD involve risks that have to be properly understood before making a final investment decision. You should only start trading with funds that you can lose since there is never a guarantee that your investment will be a successful one. Just as with all investments out there, it is knowledge that helps you make smart choices.