All you need to know about Forex and CFD trading

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The meaning of CFD is Contract For Difference. With CFDs you speculate on possible price movements of financial assets such as shares, forex and commodities. When you open a CFD position, you enter a contract between you and the CFD broker. With CFDs you can therefore trade in shares, forex, commodities etc. without actually having them.

Difference between forex trading and CFD trading

The main differences between CFD trading and forex trading are that you can apply CFD trading in a variety of markets such as indices, shares, commodities etc., while forex trading only offers currency trading. When trading CFDs, you have the option to select different contracts that vary in increasing value and currency type. Forex trading is about trading one currency against another and always consists of a certain lot size.

Another difference between CFD trading and forex trading are the factors that influence the markets. CFD trading is usually influenced by specific factors such as supply and demand of raw materials or changes in the business sector. For example the legalization of cannabis medicines. Forex trading, however, is driven by global events, such as large budget deficits of countries and international political tensions.

The biggest similarity is that with both forex and CFD trading you do not become the actual owner of the financial instrument. For example, when you open a position on EUR/USD, you do not actually buy euros and sell US dollars, but you only speculate on price changes by using contracts. Further similarities are that you trade CFDs and forex on the same platforms of online brokers such as Plus500 or eToro. In addition, the only costs traders incur are the spread. For traditional trading instruments such as shares, commission and other financial costs are charged

What is the spread?

The spread is the difference between the purchase price and the selling price. For example, if the purchase price of Shell is 21.44 and the sale price is 21.40, then the spread is 0.04. The lower the spread, the better.

Differences between shares and CFDs

The biggest difference between investing in shares and CFDs is that when you buy a share you actually become the owner of the share. With CFDs you only speculate on the price of that share. The share does not become property. When buying shares, you can therefore also get involved with the company itself. You then have the option of attending the shareholders’ meeting. Another big difference is that you can use leverage with CFDs, so that you can open a large position with a small amount of money.

How CFD trading works

If you open a ‘long’ position, you speculate on a rising price. When you close the position with a higher price than when you opened the position, you make a profit. If you open a ‘short’ position (‘go short’) you speculate on a falling price. If you close the position with a lower price than opening, you make a profit.

What is a leverage?

If an investor wants to take larger positions than the capital in his account, he applies leverage. Suppose an investor has £50 in his account and he invests with a leverage of 1:30. For example, with £50 he can invest in a position with a value of £1,500. He can then earn a lot of money in a short time, but of course also lose money.

Pros CFD trading

Cons CFD trading

Invest in stocks or invest in Forex/CFDs?

The big advantage of investing in CFDs is that you can apply leverage. Of course there are risks involved. Because you invest in a relatively large capital, you can lose your maximum investment in a short period of time. CFDs and Forex are useful for investing in the short term, because there is speculation on both a rising and a falling share price. With traditional buying of shares you only make a profit if the price of shares rises.

So if you are looking for something for the short term, and you want to invest little money in shares but have a large asset range, then opt for investing in CFDs. Due to their daily fluctuations, forex is especially popular among day traders. Compare the best Forex/CFD brokers here. If you are looking for investing in the long term, with less risk of losing money, opt for investing in shares.