While Forex and CFDs are basic financial instruments in trading, many traders still do not know how to differentiate between them. Here are the essential points to know in order to better trade on Forex or CFDs
The principles of trading and negotiation
- The Forex
Forex only concerns currency pairs. It is then a question of betting on price fluctuations. This involves dealing with changes in exchange rates from one currency to another and making either a purchase or a sale, depending on these changes. For example, if the trader believes that the exchange rate of the euro will rise against the dollar, he will then buy the euro or, in the same way, sell the dollar against the euro.
CFDs or Contract For Difference, on the other hand, concern the various financial assets available on the market. In particular, it is possible to trade company shares, commodities, metals, stock market indices and currencies on CFDs. Transactions then consist of betting on the price changes of a selected asset. The seller will then have to pay the difference in the price of the asset, between the opening time and the closing time of the contract.
Units, quotations and profits
In Forex, currencies are traded with their own units. However, on CFDs, units change from one asset to another. Sugar is traded, for example, in pounds, while oil is measured in barrels. There is then a minimum negotiable quantity, which is gathered in a “batch”.
Regarding the quotation, it also depends on the markets, but generally it is the base currency of the asset that is taken into account. It should also be noted that on CFDs, the trader does not directly pocket the profits made, unlike in the Forex market. These benefits are simply added to the value of the contract. But then, more concretely, what is the most advantageous: trading in Forex or CFDs?
The benefits include
- Forex :
The first advantage of Forex is its liquidity. It is the largest and most liquid market in the world. The quotation is available 24 hours a day, from Sunday 10pm to Friday 11pm, which means that it is almost always open. Forex trading is also cheaper since brokers are often remunerated on spreads. And it’s easy to trade.
- CFDs :
CFDs, on the other hand, provide access to assets normally reserved for professionals only. Traders also benefit from a wide range of underlying assets and can thus diversify their investments. It is also an interesting alternative for index trading.
- Forex :
However, the Forex market is very sensitive to economic changes. Traders who are not yet experienced may therefore have difficulty interpreting the statistics. Since the intervention of central banks around the world, the currency market has also become very volatile.
- CFDs :
The main disadvantage of CFDs is the additional costs. Keeping a CFD outside trading hours is, in fact, profitable and, in the long term, these expenses can be higher than the earnings.
Leverage for Forex and CFDs
For both Forex and CFDs, it is important to specify the possibility of using leverage. This can be an advantage since it allows you to bet more. But it is also a disadvantage given the risk of debt. In both cases, caution should therefore be exercised.
MassLib offers you a list of regulated brokers to trade Forex and CFDs. Feel free to consult our tests such as that of eToro, the social trading specialist or markets.com, a world reference in CFD trading.