Have you ever wondered what the difference is between CFD’s and Forex? Did you know there was a difference?Do you know what they both are? First things first then.
What is a CFD
CFD stands for Contract for Difference and it’s essentially a financial (derivative) product that allows you to buy and sell a market with leverage without ever needing to own the actual asset. The idea is that when you trade you are speculating on the price direction (either up or down / buy or sell) where you either collect some money if you make the right decision, or pay the difference depending on if you made a profitable trade or not. Because the market is leveraged (often at 1000-1) you have the potential to make money very quickly, but also lose it equally as quickly if things get away from you.
Most CFD’s are traded through a broker like CMC Markets, who makes profit on the trades you make by charging a small amount called “the spread” which is included every time a trade is entered, essentially starting you off at a very small loss.
What is Forex
Forex stands for Foreign Exchange (also shortened to FX) and is the market where people and companies / banks trade currencies – it is the largest market in the world with over $3 trillion traded daily. I quite like Forex trading as an investment opportunity, however, it does involve quite a bit of risk, so you need to be sure you are only using money you are prepared to lose. If you want to get an idea of how big of a profit you can make in the Forex market, do a quick Google search on the famous investor George Soros.
Forex is traded in almost the exact same way as CFD’s (both can be done using the common MetaTrader4 application) however there is 1 big difference between the two.
What’s the difference?
Most people get a bit confused when it comes to the differences between the two because they are so similar. They are both highly leveraged, both use spreads as a way of paying the service provider and both are traded in real time across a variety of markets, and that’s the biggest difference – the markets. Forex is where you trade currency pairs against each other, while CFD’s are where you trade commodities (think energy and metals like oil and gold).
The other major difference is the way in which the two are traded. Forex moves quite quickly based on news and central bank movements, whereas CFD’s are more likely to move because of supply and demand factors.