Dear readers, today I, trader Anna, want to tell you about popular financial instruments and their differences. One of them is CFD trading, which became available to all participants not so long ago.
This tool appeared in the UK back in the 80-ies. Previously, with its help, you could only buy or sell the difference in the value of shares. Currently, many traders prefer to simultaneously trade in several markets, and brokers give them such an opportunity.
What is the difference between CFD financial instruments
Contract for price difference, or CFD, allows the trader to earn on fluctuations in the value of a financial asset. When an agreement is concluded, the underlying asset does not become the property of the buyer. This avoids the costs and restrictions associated with its purchase and sale.
Sale CFD on Forex occurs on one account. Assets can be commodities or stock indices. The trader has the right to use the leverage that the broker provides him, so you can conduct a successful trade even with a small capital. The profit of the market participant will depend on the difference in the cost of opening and closing the position. At the same time, the amount of commission payments is taken into account.
What is the similarity between CFD and Forex?
In Forex, or the global international market, there is a trade in currency pairs. Thus, the currency is bought and sold on it. Its price is determined by agreement between the parties to the transaction. Only the supply and demand can influence the value.
Despite the differences, both activities share similarities:
• Transactions are made in the terminal through the Internet. As a rule, it is the same, which allows you to simultaneously open and close positions.
• Participants try to reduce risks by distributing investments in several areas.
• Earnings are essentially speculative, there is a spread between the sale and purchase price.
• A brokerage company provides a trader with a leverage.
But differences in trading contracts and earnings on Forex much more. Here are some of them:
1. You can work on the Forex market at any time of the day on weekdays. Trade contracts are possible only during the work of the American trading session, that is, at certain times.
2. The tools also have differences. Forex deals only with currency and currency pairs. The subject of the transaction on Contract For Diffrence are indexes and goods, as well as contracts for a number of assets.
3. Risks. In the case of contracts for price differences, they are higher or lower, depending on which product is selected. When it comes to currency pairs trading, the price can be influenced by significant events in the world, politicians' statements and even natural disasters.
4. Start-up capital. Leverage can be used in both cases, but trading CFD is possible from 10 shares. On the Forex account, the minimum lot must be from 100 000 currency units.
5. Earnings. The difference in income is also there: with equal starting conditions for trade contracts can earn more. This is the best option for participants who do not have large funds.
6. Reputation of the broker and level of its reliability. It should be taken into account that the trade in CFD-contracts is even less regulated by law than the foreign exchange market.
Therefore, we must pay close attention to the choice of a company that works honestly and respects all rules. See my rating of CFD brokers >>>
What affects the value of the contract
When determining the price of a contract, there are a number of laws Technical Analysis. Volatility here will depend on the underlying data. Fluctuations in the price of the currency largely depend on the economic state of the issuing country.
The commodity market behaves a little differently. Here, events and news relevant to this product are important.
The most popular commodity in CFD is oil, because it has a stable demand. Trade in such contracts is offered by all well-known brokers. The price of raw materials constantly varies depending on various factors. These are statements about the reduction or increase in production in exporting countries, official information on resource stocks and other news.
To build an effectively operating business, you need to thoroughly understand this or that area. If the trade in different currencies passes on general principles, then all stocks, commodities and indices have their own characteristics, which must be taken into account.
How to choose the best type of earnings
In such a serious matter, one can not do without theoretical knowledge and practical experience. On my Youtube you will find a large selection of teaching materials. If you subscribe, you can receive information about the appearance of new courses, analytics, conducting webinars. You will have the opportunity to try your hand in different directions, and then choose the most profitable and interesting.
So in the differences we have figured out. Forex allows you to work with pairs of different currencies, CFD contracts - with the difference in the value of goods, indices and other assets. When choosing your option, you need to consider the broker's reputation, the size of the deposit, possible risks and other factors.