Newcomers to the world of investing will have many questions, and it is important to get the answers before launching into any investment activity because mistakes can be costly.
One of the most commonly asked questions concerns the difference between CFD and FX trading. At first glance, these two types of trading activity have many similarities. For a start, both types of trade are carried out on the same platform and involve using charts and pricing methods that are similar. Both types of trade are also carried out in what is known as the over-the-counter (OTC) market, which is handled entirely electronically by a banking network, without any central exchange.
More significantly, both versions of trading have the same underlying principle; in both cases, you are not technically owning the underlying asset that you are trading.
But although there are some similarities, it would be a mistake to treat these two types of trading as the same. Both require distinct skills, and there are three fundamental differences between them.
Perhaps the most obvious difference between CFD and Forex trading is that when you are trading CFDs, you can choose from a wide variety of different kinds of contracts that cover a huge range of markets, from energy to metals. You can find CFD Brokers who specialise in everything from currency type to increment value, which will be different according to the territory in which the asset originates.
By contrast, FX trading is simply about trading one currency against another. This type of trading is always done in standard lot sizes, offering less flexibility.
Another essential different between CFD trading and FX trading is the factors that influence the markets. CFD trading prices are usually influenced by factors that are specific to the underlying asset, such as its supply and demand or changes associated with related business sectors.
By contrast, FX trading is much more vulnerable to major global and national events, including economic news, political instability and tax or regulation changes. Every piece of economic or political news can, in theory, affect the trade price in the FX markets, and FX traders have to keep a much closer eye on global political and economic news than CFD traders.
The final important difference between the two types of trading relates to timing and market availability. The FX trading market is open 24-hours a day for the whole working week, offering more opportunities for FX traders to make their trades. When it comes to CFD trading, market availability is more restricted. CFD trading times will vary based on the particular market, commodity or asset that the CFD is based upon, but will not be as wide as the trading times for FX markets.
CFD and FX trading may have some similarities, but the differences between them are quite substantial. It is important to know the differences so that you can make the best decision on which type of trading to opt for and how to go about building a trading strategy around each one.