Forex and CFD are two of the widest traded financial markets; however, they provide different advantages to traders, which makes one better suited for certain traders than others.
So without further ado, let’s jump into the breakdown of each market’s characteristics to provide you with a better understanding of them, which will thus enable you to choose the best form of trading for you.
What are the CFD and Forex Markets Like?
Trading in the Forex exchange means being part of a financial market whose trade volume tops more than a trillion per day, which provides the chance for traders to earn higher profits on their transactions
Its history also traces back more than a century, which is most likely why it is also trusted by the majority of traders, making it the biggest financial market worldwide.
The CFD market, on the other hand, didn’t emerge until the 90s, so it is still relatively new and considered an innovative trading instrument, which many other traders also appreciate.
Similarities of CFDs and Forex
Both Forex and CFD markets are alike in that traders do not actually own the underlying assets. Instead, they are speculating on their value.
However, in Forex markets, this value is the exchange rate, while in CFD markets, the trader purchases a CFD contract on the FTSE 100 speculating on its underlying stock price.
Both markets’ trades are also executed electronically within a collection of banks in the over-the-counter market, which offers no central exchange or tangible location,
and they also utilize the same platform as well as similar pricing methods and charts.
Participants in both markets can also place an order at any time. Likewise, they can also exit the market whether it’s dropping or rising.
The CFD market and the Forex market also provide their traders the unique benefit of no finance fees, including commissions. Instead, they simply pay the cost of the spread.
The Difference Between Forex and CFD
Like the CFD market, Forex trading also involves currencies; however, unlike CFD trading, it is solely for trading currency, which according to Capital.com, “also provides the benefit of extreme liquidity when CFD on forex is bought and sold.”
On the other hand, CFD traders can purchase a wide range of contracts in various other markets as well, including equities, commodities, cryptocurrencies, and more.
In Forex trading, one currency is traded against another, and they are also traded in equal lot sizes. However, in CFD trading, the contracts differ in currency value and increments as determined by their origin of the underlying assets.
CFD markets are also influenced by different factors than Forex markets, including regional trends and the supply and demand of a given commodity. Meanwhile, the Forex market is mainly affected by international political changes and other global occurrences.
So the main difference between CFD trading and Forex trading, and which is better, all comes down to the type of contracts you want to use for your trading plan. You may also consider the underlying factors affecting each market to also determine which is best according to your objectives.