Is forex trade a safer option than investing in Contracts for Difference (CFDs)?
September 17, 2018 (Investorideas.com Newswire) The contract for difference and forex trade are often considered as two branches of the same tree by novice traders. No doubt, there is some sameness, but a lot of dissimilarities exist. Here're some points that can help you understand the fundamental difference between both the products.
What are CFDs? What is forex trade?
Forex involves currency trading. Investors can use their home currency to buy any money from around the world and sell the same once the value to the concerned currency increases. There are millions of people who trade currencies and make a profit on a daily basis. Fx trade is legal and regulated in most of the countries around the world.
With CFD - contract for difference, a trader can make money by speculating about rising/falling prices of the given instrument(s) like commodities, shares, currencies, and metals, etc. The profit made by the investor is calculated from the trade's entry and exit price. CFD is an agreement between the broker and the client. Only brokers/firms with a license from the European Securities and Markets Authority can issue CFDs in Europe. The contract for difference trading is banned in several countries as it is considered too speculative and high-risk investment option. In some nations, the CFD trading has certain restrictions for consumer protection.
Are there any similarities?
Investors can quickly enter and exit both the markets, and the overall buying/selling process is similar. The pricing methods and charts are also displayed in the same way on most of the trading platforms. There is no central exchange involved in both transactions and OTC market executes trades.
As mentioned earlier, CFD trade involves speculating on the increase/decrease of the selected commodity's rate. There is no involvement of any physical product. Same is the case in FX trade. Investors only speculate while buying and selling; there's no physical exchange of currency involved.
Traders with a limited amount of capital are often drawn to CFD as well as forex trading due to the leverage option. Investors can control a large position even with a small amount of capital funds.
In both the options, a trader needs to analyze every trade carefully and make sure that he will make at least some profit after deducting the cost of financing and transaction charge payable to the broker. To avoid losses, investors can use stop-loss trade feature in both the options. The margin closeout rules, as well as the leverage limits offered on both products by online brokers, may vary from one country to the other.
Long-term, hedge, swing, and news trade are some of the most popular CFD strategies.
Excellent trading platforms, like the ones offered by Admiral Markets, play an essential role in providing market-related reports and trade execution. High-speed internet connection and a keen interest in current affairs are the two factors that you will need in both types of trading.
What's the difference between the two?
There are several dissimilarities between contracts for difference and forex. The latter can be used only while buying one currency with the other. On the other hand, CFDs allow investors to invest in contracts from metals, energy, oil and gas, cryptocurrencies, indices, and even currencies.
CFD transactions cannot be done 24*7 in most of the markets and trader needs to make trades according to the underlying market's timeframe. Whereas forex transactions can be performed at any time, except for weekends. Compared to the contracts for difference, forex transactions are fast-paced. You can follow horario forex to find the best trading time possible.
Forex market is often influenced due to global and local economic factors. But, CFDs can be influenced only due to sully and demand related factors affecting the concerned commodity.
Understanding the fundamentals behind the ups and downs of the currency value is a "macroeconomic" endeavor. Investors need to understand the economy of the country whose currency they are investing in. But while investing in the futures market, one needs to have industry-specific knowledge and has to have an idea about decisions that may be taken behind the company's closed doors.
Online brokers who offer contracts for difference trading platform apply charges for the spread, a certain percentage of commission per trade as well as daily interest charge on business carried forward. Forex brokers may charge a small amount of commission on every transaction. Remember, fees may vary from one online trading broker to the other. Several traders offer both the services with the help of a single trading platform.
Small moves can help in making some profit in fx, but with CFDs, a slight gain can get wiped off due to charges applicable to transactions.
Orders in forex are executed immediately if placed during the right timeframe. At the other end, in case of a lack of liquidity, the CFDs execution and price delivery may get delayed.
How do automated forex robots work?
Forex trading software programs or robots are programmed to make currency buying and selling decisions based on currency movements and trade charts. You can program the system in advance to buy your desired currency at a specific rate and sell the same when it drops below the selected point. Such systems allow traders to buy and sell automatically, even when they are not present to monitor the market or to personally execute the trade. Unfortunate, several platforms block or suspend the user account as soon as they detect the use of software programs for making electronic transactions. As mentioned earlier, robots work on signals and charts, but they cannot understand the economic factors that may suddenly influence the market.
Before installing such software, make sure that it is offered by a genuine company that has a good reputation in the financial markets around the world. This product is strictly recommended for investors who know in and out about foreign currency transactions. Novice traders can end up losing all their capital if they try to use such robots.
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