Forex vs CFDs: Everything you need to know

As a trader, you’ll be constantly looking for different markets to explore and invest in. Diversifying your portfolio is a sensible and worthwhile pursuit, though not every market will suit every trader. Two options you might be considering are contracts for difference (CFDs) and forex – and learning more about how they work will help you define your long-term trading plan with confidence.  

CFDs are the more complicated of the two and involve traders and brokers exchanging the difference between entry and exit prices of underlying assets. Forex on the other hand simply describes trading currencies against each other – like Australian and US dollars, the fourth largest currency pair by total trades in 2020. You can actually speculate on the forex market through CFDs, as well as on precious metals, natural resources and indices. 

Neither option is objectively better or worse, so read up on the key similarities and differences below to understand which might better suit your trading style.

Similarities between forex and CFDs

An important similarity to note is that neither market gives you ownership of the underlying asset you’re trading. You’re either speculating on the value of currencies going up or down or buying a contract speculating on the value of underlying assets doing the same.

Trades in both markets are typically executed the same way too. You can easily start CFD trading and forex trading through the same platform, and the transactions themselves are decentralised. 

In both markets, it’s possible to speculate on both upward and downward trends by going long or short. They both offer access to margin too – though this is usually a percentage for CFDs, and a ratio for forex. 

Crucially, you need to have a solid strategy built on research and risk management to achieve sustainable success in either space. 

Differences between forex and CFDs

Perhaps the most obvious difference is that forex trading is limited to currencies, while CFD trading covers a wider range of assets and instruments. This makes CFD trading both more versatile and more complex. 

Another distinction is in how their prices are determined. CFD value is primarily dictated by supply and demand, while currency value is influenced by key economic indicators, political policies and other factors.  

Finally, you can trade on the forex market at any hour of the day, five days a week. CFD trading times on the other hand vary depending on the underlying market or asset. 

If you’re aiming to boost your returns in response to the cost-of-living increase in Australia, you’re not alone. Could either of these markets bolster your trading strategy?

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Christophe Rude

Christophe Rude

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