Who should use a contract for difference, and who would be better suited to forex?
The following articles what to keep in mind while choosing CFDs or Forex trading. In a contract for difference (CFD), an investor can invest in the price movement of a pair. Thus, a CFD allows you to speculate on the price movement while ensuring that your losses or gains will not exceed your initial investment amount. This is achieved through leverage, meaning that there are many more units of the underlying asset for every one contract.
Forex Trading involves the direct buying of a currency pair on one side and selling it for another to make a profit when there is movement in the value of these two currencies relative to each other. Losses are incurred if this price does not move as expected or moves negatively. A CFD allows an investor to trade forex in a way that is less risky than forex.
The CFD market has been growing steadily for more than 30 years and is now part of the mainstream financial markets. Executed on regulated exchanges, the purchase and sale of CFDs are recorded as trades or orders with price, volume, and time details attached to each.
CFD trading can allow for quick and easy diversification opportunities across multiple markets. For example, there are over 1000 CFDs available on the forex market alone, which offer an investor a chance to speculate on commodities, equities, indices, ETFs, and more. In addition, individual investors who may not be able to trade in all these funds directly or without extra-legal and tax considerations can take advantage of the CFD market’s flexibility. Learn more on the uses and differences of CFDs and Forex by visiting markets.com.
Price and contract size
There are some key differences in terms of price and contract size between CFDs and forex, although there is no reason why an investor cannot trade both markets concurrently using these tools. The main difference is that with a CFD, you are trading against leverage, while forex is based on the current spot price.
Contracts for difference allow you to trade with leverage, which means that if the market moves in your favour – and more than expected – you can make a profit much larger than your initial investment amount. But CFDs work both ways -if the market moves against you before settlement occurs, the losses can exceed your initial investment amount.
Are there any disadvantages?
Not necessarily. The biggest problem with CFDs may be the cost of trading – these are not cheap instruments to buy or sell, and will only suit those who have access to a sufficiently large amount of disposable income.
There is also no capital guarantee – if the price of the instrument you have purchased falls by more than 100%, your broker will force you to liquidate. Leverage can also work against you and mean that a relatively small percentage fall in value is enough to wipe out all your capital.