Traders need to understand the differences and similarities between contract for difference (CFD) and forex. While each can be useful during speculation in its own way, traders may prefer to use only one rather than both in certain situations.

In this guide, we will look at what CDF and forex are, how they differ and how they are similar. By the time you reach the end, you will know what to choose: forex or CFD.

What is CFD?

A CFD exists between the trader and the broker as they work to agree on a mutually beneficial method of paying the difference between the opening and closing prices of the underlying asset.

CFDs are commonly used to speculate on exchange rates, although other applications include betting on valuable assets such as oil and metals. One of the benefits of choosing to trade CFDs is the flexibility they provide: investors can choose the currencies they want to trade, as well as their preferred increments.

Investors can calculate the loss or profit they receive on any trade by multiplying the difference between the opening and closing prices and then multiplying the result by the number of CFD units.

If this all seems complicated, you are not alone: ​​this can be a difficult concept to grasp.

Luckily, forex is a little easier to understand for most people.

What is Forex?

Forex (FX) is the world's largest financial market. Its trading volume is in the trillions of dollars every day.

Forex does not have a main, central location: instead, it consists of a network of electronic banks, traders, brokers, and financial institutions.

What are the similarities between CFDs and Forex?

Let's take a look at the key similarities between CFDs and forex.

First of all, there is no need to transfer physical assets to either, since they both involve over-the-counter (OTC) trading. As a result, all transactions are processed through a network of different financial institutions on the same platforms.

This is why various service providers have created platforms to enable traders to take advantage of CFDs and Forex at their leisure.

In addition, CFDs and forex provide traders with valuable access to margin, although they are slightly different. For example, in the case of CFDs, the margin is presented as a set percentage, such as 20 percent. In this case, the trader must deposit 20 percent of the contract value before borrowing the remaining amount.

However, in forex, margin is presented in ratio format. For example, a trader might have a leverage of 1:7, allowing them to process $7 worth of trades for every dollar deposited in their account.

Finally, the trading costs of both CFDs and forex are based (in part) on the difference between open and close points. This is worth keeping in mind when trying to choose one over the other.

So, now we know how CFDs and Forex are similar, and how do they differ?

What are the differences?

Earlier we talked about how CFDs provide additional flexibility through different contracts with different currencies and values. But the first major difference to keep in mind when choosing forex or CFDs is the way prices are determined.

With CFDs, pricing is based primarily on the current level of supply and demand for the asset. But for currencies, the value depends more on factors such as politics and economic performance.

Another major difference that encourages investors to choose forex or CFDs is the opening hours. CFD trading takes place according to the respective commodity, market or asset, while forex is open 24 hours a day, five days a week (although holidays may change this).

CFD vs Forex: Conclusion

As our guide to CFDs and Forex shows, they have quite a few similarities and differences. Trying to understand both can lead to more informed decisions, which always leads to a more effective trading strategy.

Take the time to consider both CFDs and forex before choosing your trading options. This can help achieve more satisfying and beneficial results in the long run.