Both Forex and CFDs are two different kinds of investment options for traders all around the world. They each have their individual merits and demerits. Neither can be called better but they certainly are unique and bear a level of compatibility with different trading styles.
Forex is a bit older of the two and thus better established with more traders engaged. CFDs are comparatively newer but steadily rising in popularity. An Indian investor now has potentially more options for investing with CFD providing clear windfalls on the financial horizon. Though the traditional Indian investor would be wise in shying away from CFD trading because the ‘big gain’ scenario is associated with ‘big risks’ as well.
The major differences between Forex and CFDs Trading:
Instrument Selection:
Forex trading is limited to currencies. CFD trading can be conducted over many different kinds of assets. There are 8 main currencies that constitute the entirety of the Forex market with investors known to deal with 40 to 70 currencies including majors, minors, and exotics. Whereas CFD contracts include but are not limited to currencies, instead offering thousands of different instruments. As a result, CFD trading is more complex. CFD contracts offer forex, equities, indices, and commodities, giving you access to wider trading avenues and international stock portfolios. Cryptocurrency CFDs have been slowly generating more and more interest in trading spaces as cryptocurrencies gained more popularity worldwide.
Sizes of Contract:
Forex offers a uniform lot size no matter which pair of currencies you are dealing with. A standard Forex lot comprises 100,000 units of currency. Smaller accounts are also offered by brokers which are fractions of a standard lot. 10,000, 1,000, and 100 units of currency make up these mini, micro, and nano lots respectively.
CFD, on the other hand, offers not only many different kinds of instruments to trade in but also a varied range of sizes in contracts. The amount of the asset which constitutes one CFD can vary depending on the instrument chosen by the trader. For example, 100 ounces make up one standard CFD contract for metals while one share amounts to one standard contract for equities.
Influences of the Market:
The CFD and forex markets are influenced by many different factors. For forex, global macroeconomic events and economic factors play a decisive role in dictating price movements. These can include but are not limited to, huge shifts in employment in specific areas, risk sentiment, speculations on financial policies and their effects on the GDPs of countries whose currencies are being dealt with in the trade, political changes in the international landscape, and even environmental factors to a degree.
On the other hand, the CFD market experiences price fluctuations depending on the particular factors which specifically affect or influence the instrument under consideration. These can include but are not limited to, changes in the trends of a particular business sector or the production and distribution of a certain commodity. For example, crude oil CFD values are influenced by supply and demand of oil, and equity CFD prices are dependent on company-specific events and business factors like acquisitions and earnings.
The Trading Costs:
The costs of trading both CFDs and forex are based on the spread in some way. But CFDs vary in value depending on the other involved factors like trading conditions and the concerned assets which are being traded. To exemplify, overnight financing costs can be incurred by a CFD position held overnight. Forex and commodity CFDs normally attract the spread as the cost of trading while commissions can be involved with the transaction costs of equity CFDs.
Conclusion:
In conclusion, Forex and CFDs are distinct trading instruments with their own characteristics and advantages. Forex focuses solely on currency pairs, while CFDs allow trading on a wider range of assets. Both offer potential for profit, but also come with inherent risks. Traders must understand the differences and choose the instrument that aligns with their goals, risk tolerance, and preferred markets. With clarity, wise Indian investors should choose their trading methods wisely, focusing on greater prospects.
