CFD trading and Forex trading have many similarities. To start with, both types of trading involve a similar trade execution process. Traders can easily enter or exit the market in both rising and falling markets. They both are also executed on the same platform, using similar looking charts and pricing methods. In both cases, trades are executed in the over the counter (OTC) market, which is run entirely electronically within a network of banks, with no physical location or central exchange. Another similarity between CFD trading and Forex trading is that the only cost of trading is the spread, as opposed to other types of trading instruments that charge commissions and other finance fees.
The primary similarity between CFD trading and forex trading is that neither entitles the trader to actual ownership of the underlying asset. When one buys EURAUD, for instance, one is not actually purchasing euros and selling Australian dollars; rather the trader is simply speculating on the exchange rate. Likewise, when a trader purchases a CFD contract on the FTSE 100, the trader is not actually owning the stocks in the FTSE index, but rather is speculating on its underlying price. In many ways, Forex is simply another kind of CFD.
When we look at the differences between CFD trading and Forex trading is that CFD trading involves different types of contracts covering a diverse set of markets, such as indices, energy, and metals, whereas Forex offers pure currency trading. When you trade CFDs, you can select different contracts that vary in increment value and currency type, depending on the country in which the underlying asset originates. Forex trading is about trading one currency against another currency and always involves trading in uniform lot sizes.
A final difference between CFD trading and Forex trading relates to the general factors that tend to influence the different markets. CFD trading is mostly influenced by specific factors, such as supply, and demand of a given commodity or trend changes associated with business sectors. Forex trading on the other hand is mainly driven by global events, like large employment shifts or international political changes.
By Suren Subramaniam | 25 August 2020