CFD and Forex currency pairs trading: similarities and differences
International currency market Forex is nowadays the most popular option for working on financial markets. The scheme of its functioning is close and open to the understanding of the majority of the population, which, one way or another, encounters currency transactions in everyday life. As for trading CFD contracts, this type of speculation is only gaining popularity in the financial market due to the trivial logic of the working process and accessibility for the interested audience.
Similarities of Forex instruments and CFD contracts
In the process of identifying similarities and differences between these trading methods, many professionals and financial market gurus have identified the following similar parameters of Forex and CFD trading instruments:
- trading is conducted in a trading terminal via the Internet;
- both financial instruments have the ability to diversify their portfolio in order to insure against probable losses;
- The common goals pursued in their work are to make speculative profits;
- no tax requirements for withdrawal of funds from the trading account;
- availability of leverage and payment for its use (TOM/NEXT operation on the Forex market);
- the presence of a spread between buy and sell prices.
Based on the above common characteristics, a multitude of companies specializing in providing brokerage services in the west emphasize on real similarity the process of trading on the Forex market with trading CFD contracts.
Differences between Forex instruments and CFDs
Along with the similarities, there are identified and Differences between Forex trading and CFDsThe main ones are:
- CFD trading is available during certain hours (only according to the American session time), Forex trading is possible 24 hours a day, 5 days a week;
- In Forex, the working instruments are currency pairs, while CFD contracts are focused on indices and shares, futuresand currencies and commodities;
- the level of maximum leverage for Forex trading is higher than for CFD trading;
- Most often the same specialized brokerage companies are engaged in providing services for entering the international market both for CFD and Forex;
- influence on price changes from a wide range of macroeconomic factors, which makes the attention of speculators to the method of fundamental analysis relevant;
- CFD trading is characterized by qualitatively lower risk than Forex.
The Forex market, as well as CFDs, is an over-the-counter market, but futures contracts were used as a basis for creating CFDs. What does this tell us? If we take CFDs on stock market assets as an example, in comparison with them, Forex market is much more resilient to shocks in the global economy. Any important events in the world are first of all reflected in the state of the stock markets. And on Forex - the price of one currency goes up, the price of another currency goes down. No panic reactions and depressions.....
Only you - active participants of financial markets - can judge which instruments are more profitable and interesting to work with!