What is a contract for difference?
A contract for difference (CFD) is an agreement between two people or parties. A buyer and seller of the CFD agree to exchange the difference in value of an asset between the time they enter into the arrangement and when it expires.
The underlying asset may be shares in company, currency pairs or any other type of assets. We suggest using markets.com and start trading and grow finances today. This is a safe and regulated site that you can trust with putting your finances in.
How much can I make in CFDs?
Investing in CFDs is one way of earning a return on your investment. However, any income generated will be dependent on the amount invested and the price movements of the underlying asset. Remember that if you are unsure about these products or if you cannot afford to lose it all then do not trade CFDs.
Key differences between CFDs and forex
- CFDs and forex both involve trading on the price movement of an underlying asset, whether it is a commodity or the stock of a company. With a CFD, you don’t own anything, which means that if your trade loses money, then you lose money. This is called a ‘negative balance.’ With a forex trade, you are swapping one currency for another. You can then choose to change it back and convert your profit or loss into the original currency. This is called a ‘positive balance.’
- Forex traders have the leverage of 50:1, whereas CFDs have the leverage of 500:1. Therefore forex trades have a lower risk and can help you to build up your profit. In addition, with the leverage of 500:1, CFDs require only a small deposit to let you trade on larger sums than those available with traditional investment strategies.
- CFD traders pay no transaction fees, whereas forex traders pay commissions every time they open or close a trade. In addition, with forex trading, you are dealing in the actual currencies themselves, whereas CFDs allow you to trade on the interest rate difference of a currency pair (e.g., EURUSD).
- Forex is available worldwide, whereas CFD can only be used in countries where it is regulated and authorized to operate by local authorities.
- CFDs require investors to purchase shares, whereas forex is just buying and selling currency pairs.
- Forex has a reputation for being complicated, requiring experienced traders who can manage risk levels and profit margins properly. On the other hand, CFD trading requires a much smaller initial investment; however, there is less room to profit.
- CFDs allow traders to profit from the upward and downward movements of the price. In contrast, forex is based only on a trader’s ability to predict whether the currency pair will move in one direction or another.
- Traders need to understand all differences between CFDs and Forex before deciding which type of trading suits their investment strategy.