CFD vs. Forex: Differences, Similarities, and Which to Choose

Updated May 9, 2022 Forex​Guides

Contracts for difference (CFD) and forex continue to be amongst the most used trading instruments in the trading arena. Each of these two instruments contains different perks and shortcomings, and we’re going to make a comparison between the two.

Let’s look at the unique features of each and find out which will work well for you.

CFDs vs. Forex: Which Suits You More?

Contract for differences (CFD) can be an option for trading if:

  • You are not interested in owning the underlying assets
  • You want a trading instrument that allows you to enter and exit markets fast
  • You prefer to take advantage of the price movement of the underlying asset
  • You like using different trading patterns depending on the prevailing market situation
  • You want to make trades regardless of a bull or bear market

Forex trading is an option if:

  • You want to trade currency pairs only
  • You would rather not pay unnecessary overhead costs
  • You prefer high-risk instruments
  • You need a trading market with high liquidity
  • You have a low budget to kickstart your trading

Similarities Between CFDs and Forex

1. Both Have a Similar Trade Execution Process

You can use similar price action strategies to enter and exit bullish or bearish markets. Also, you can trade both CFDs and Forex pairs over the counter, on the same platform, using similar charts and pricing strategies.

CFDs and currency pairs don’t have to be listed on exchanges for you to trade them. Instead, you can opt to trade both instruments on an online CFD trading platform.

2. No Don’t Need to Own Underlying Assets

You can trade currency pairs or CFDs without owning the actual underlying assets. You only speculate on their price movements. For instance, you can buy the EUR/USD pair without buying any actual Euros or selling any US dollars. [1]

3. Both Instruments Don’t Pay a Commission

Unlike other instruments, trading contracts for differences and forex markets doesn’t attract commissions. Traders only pay the difference between the asking price and the offering price, also known as Spread. Sometimes, there may be other costs, except commissions.

4. Both Markets Offer High Levels of Liquidity

Both CFDs and forex markets have excellent liquidity. That means you can fill in your order at any time, at your preferred price. It also means that you have the flexibility to enter or exit any forex or CFD position as you deem fit.

Differences Between CFDs and Forex

1. Choice of Trading Instruments

CFDs allow you to trade a broader range of assets, including forex.  However, you can only trade currency pairs in forex markets. 

Many forex brokers will give you access to all the eight major currency pairs and other minor currencies. The eight majors are:

  • GBP/USD (British pound/US dollar)
  • AUD/USD (Australian dollar/US dollar)
  • EUR/USD (euro/US dollar)
  • USD/JPY (US dollar/Japanese yen)
  • USD/CHF (US dollar/Swiss franc)
  • USD/CAD (US dollar/Canadian dollar)
  • USD/HKD (US dollar/Hong Kong dollar)
  • EUR/GBP (euro/British pound sterling)

However, contracts for differences will allow you access to thousands of other markets, including multiple currency pairs. Some of the markets you can access with CFDs include:

2. Cost of Trading

Both CFDs and forex trades incur spreads. As a CFD trader, you may, however, meet extra fees along the way. Factors like market conditions and your broker can affect your trading costs.

For example, one common additional charge paid on CFDs is a holding fee. Your broker will charge you holding fees for any contracts you choose to hold overnight.

Another common additional charge is commissions from the transaction costs you incur trading Share CFDs.

3. Market Forces

Economic factors and international trading events can affect forex markets. Some of these factors are geopolitical events, shifts in a regions’ job markets, and changes in monetary policies. [3]

The CFD market is mostly affected by the forces of demand and supply, or a shift in the trend of a specific business sector. A great example of this is the demand for cryptocurrencies, where the number of coins in supply will affect the cryptocurrency CFDs market.

4. Size of Traded Contracts

In forex trading, the standard lot size for all currency pairs is 100,000 units. But, brokers can offer you leverage and allow you to trade smaller lots, including mini (10,000), macro (1,000), and nano (100) lots.

The size of a CFD contract, on the other hand, varies between markets. For example, while shares are generally one share per contract, metals trade in standards of 100 ounces. Therefore one CFD contract would represent 100 ounces of a given metal, like silver.

5. Trading Hours

The trading periods for CFDs and forex markets vary. For example, you can trade the forex markets for 24 hours a day, but only on Monday to Friday. These trading hours allow you to make flexible trading decisions, regardless of where you are globally. [4]

Except for forex CFDs, you can trade other CFDs over the weekend too. However, some markets are only available during certain time periods.

Factors in Deciding Between CFDs and Forex

Market Diversity

Unlike forex which limits you to currency pairs only, CFDs allow you to trade a wider range of assets, including forex.

There isn’t much diversity in the forex markets. For example, most forex brokers offer the major eight currency pairs, but also allow you to trade up to 70 other minor currencies.

CFDs give you more freedom. For instance, you can trade commodities, indices, shares, ETFs, crypto and more using CFDs. These markets offer plenty of diversity for all your trade ideas.

If you’re looking for opportunities to diversify and hedge your trades, then CFDs could do you better than just the forex markets.

Availability

The CFD markets aren’t always available. For example, CFDs are banned entirely in the USand Brazil. If you’re in these markets, you won’t be able to access CFDs in any capacity. However, in many parts across Europe, in Australia, the UK, and the Asia-Pacific, you can access CFDs without any restrictions. [5]

Forex markets are available across the world, and you can trade them directly through regulated exchanges or indirectly through brokers.

If you’re in a market that has tough regulations against trading CFDs, you may opt for forex trading.

Price Determinants

Most times, the price of CFDs is determined by the supply and demand of the underlying asset. The higher the demand for the asset, the higher the demand for the correlating CFD. That makes CFDs ideal for trading price movements, since all you have to do is observe the movement of the underlying asset.

Forex markets move largely because of fundamental factors. For this reason, forces such as geopolitical events, government policy and other economic indicators have a massive influence on the price action of currencies.

If you prefer to speculate on price changes, then CFDs are a good bet. If you prefer to use fundamental analysis to time your trades, or create a strategy, then forex would be ideal.

Conclusion

Investors looking to take advantage of market opportunities, geopolitical events and other risk events can consider trading forex. If you don’t mind the amount of regulation on the trading instrument but still want to diversify your portfolio, then CFDs can be an option for you.

CFDs face fewer hurdles in terms of market value than forex, where there are multiple determinants of the market value.


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Reference

  1.  “Forex vs CFDs |Learn the Difference – AMP Global.” https://www.ampglobal.com/education/forex_vs_cfds.html. Accessed 7 Apr. 2022.
  2. “An Introduction to Contract for Differences (CFDs) – Investopedia.” https://www.investopedia.com/articles/stocks/09/trade-a-cfd.asp. Accessed 7 Apr. 2022.
  3. “Fundamental Analysis | Learn Forex Fundamental Analysis – BabyPips.” https://www.babypips.com/learn/forex/fundamental-analysis. Accessed 7 Apr. 2022.
  4. “Forex Market Hours – Forex Market Time Converter – BabyPips.” https://www.babypips.com/tools/forex-market-hours. Accessed 8 Apr. 2022.
  5. “Why are CFDs not permitted in the USA? – Contracts-For-Difference ….” https://www.contracts-for-difference.com/USA-restrictions.html. Accessed 8 Apr. 2022.

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