CFDs, Forex trading – for many, these two distinct instruments are commonly regarded as concomitant. After all, they are both a form of trading, and are typically offered online by various brokers and financial services platforms. Indeed, it’s rare if not borderline unheard of for brokers to offer one but not the other (the two are, also, often joined by other forms of trading – so, for instance, you’ll find services online offering CFD Forex trading and spread betting). This is because they are both underpinned by the same pricing approach, and are both executed in what is referred to as the over-the-counter (or, ‘OTC’) market. This is a purely hypothetical market without a physical headquarters or centralised exchange system. Another key resemblance amid the two is that those trading these instruments do not incur direct costs or fees – with both forms of trading, the only cost to a trader is the spread. Whilst not unique in this regard, traders face upfront charges (such as commission fees) in most other forms of trading.
This obvious synonymy can lead to people mistaking one for the other, or assuming they are exactly alike. Whilst they share much in common, this is not the case, and caution is recommended; getting the two separate forms of trading mixed up could be perilous for a novice trader. CFD and FX trading have many key differences – for instance, CFD covers a wide variety of contracts, and a voluminous number of markets. CFD Trading allows traders to trade on such markets as energy and precious metals. The term Forex is an abbreviation of ‘Foreign Exchange’, and it should be no surprise that FX specifically deals the trading of currency (and other forms of tender, such as gold). FX trading is, at its core, centred on trading one currency against another; CFD allows traders to bet in a number of different international markets, with different values and currencies involved. The movement of both markets are also influenced by separate factors. Fluctuations and rises and falls in the Forex world are commonly attributable to the general state of the global financial environment, and the general state of a nation’s economy in particular – if, say, Canada’s exchequer is doing well and their political situation is stable, the Canadian dollar will perform strongly, and vice versa. CFD markets are shaped and influenced by precise dynamics – for instance, the general availability of a particular commodity, or key metrics (such as trends or changes in a market or business environment).
However, neither CFD Forex Trading actually give a trader direct, tangible ownership of the particular asset, or assets, they are trading. If, say, a CFD trader purchases a listed company’s contract, the trader does not really own stocks in that firm; they are merely speculating on its price. Similarly, when a Forex trader trades Euros and sells US Dollars neither currency actually passes through the trader’s hands in physical form. The trader is speculating on the exchange rates of the currencies involved.