Factors That Distinguish Forex from CFDs
Forex trading is the most popular trading market in the world. CFD trading is also another trading market gaining lots of popularity. Both trading markets are appealing popular choices because of their ability to generate income in the financial markets.
However, because they appear very similar to the public, some traders, especially the novices, find it challenging to determine which among the two the best to start their trading endeavors is. Before trading forex or CFD, you must first familiarize yourself with their drawbacks, benefits, capital requirements, etc.
Some people will prefer to trade forex because of the assumption that it is more superior to CFD trading. However, none of the two is more superior to the other. They share many similarities and a few differences. Below are factors that distinguish the two trading markets.
1. History and Appearance
Foreign exchange is one of the oldest financial trading markets in the world, it dates back to thousands of years ago, and its popularity keeps getting better year after year. It is also the largest liquid market with over $6 trillion traded daily across financial platforms worldwide.
Despite the financial market making many traders earn immense gains because of the large volume of cash traded daily, many others have lost their investments quickly because it is also a highly volatile market. Forex trading involves trading different currencies against each other. It is straightforward and does not involve too many calculations.
CFD trading is an innovative trading instrument that does not have a long history as forex trading. It entered the market in the early 1990s, and even though it took a while to gain ground, it is now one of the other preferred trading markets besides forex. CFD is an agreement or contract between brokers and traders.
It stipulates that the broker pay the trader the difference of an underlying asset’s entry and exit price. CFD trading provides traders with flexibility and options on currencies, value traded, and what to trade. To determine the CFD profit or loss, you multiply the difference between entry and exit prices by the volume of CFD units traded.
2. Market Influences
Both forex and CFD trading has a variety of factors that influence their markets. Economic and macroeconomic events are the main factors that affect the forex market’s price swings. The factors range from unemployment, political unrest, GDP, environmental concerns, and risk sentiments.
On the other hand, the factors that mainly influence the CFD market are the supply and demand of specific trading items or a change of trends in the industry. However, some factors that influence the foreign exchange market can also do the same to the CFD market. Some of this are-
- Seasonal oil supply and demand
- Competing cryptocurrencies in the market
- Company acquisitions
3. Trading Instruments
In CFD trading, there are no restrictions to one particular trading asset. On the other hand, forex trading restricts its trading medium exchange as strictly currencies. Even though there are eight main currencies traded on the forex market, you can trade more than 40 different currencies on a brokerage firm. In CFD trading, you have the option of trading currencies, indices, equities, and commodities, which provides you with more diversity.
Both CFD and forex trading rely much on spreads though you pay additional fees in CFD trading. Besides the spread, the only other cost in forex trading is commission. If you hold a position overnight in CFD trading, you will need to pay overnight costs.
5. Contract Sizes
The forex trading contract size is a fixed 100,000 units. Even though you cannot modify the lot size, some forex brokers offer Nano, micro, and mini lots, thus opening up a broader market. CFDs are versatile and accommodate a more comprehensive array of contract sizes.
CFD and forex trading are both leveraged markets, but the amounts differ. In forex trading, traders provide more leverage while they need a lower margin for CFD trading.
Choosing between forex trading and CFD trading is challenging because they appear almost similar on the surface. Before opting for one over the other, it is essential to follow your trading objectives and choose the option that will make you accomplish what you want.
You should also take in mind the risk profile, limitations, and benefits of each market. Consequently, it all comes down to your preference.