A Contract for difference offers investors and traders diverse opportunities to profit in the market from the price movement of assets without owning the asset. This profit is calculated as the difference between the entry point of the trade and its exit point. CFD provides several advantages for traders, considering the number of assets available to trade. However, the number of assets gives traders a whole lot of options on what instrument to trade. These assets include bonds, exchange-traded funds, and commodities. For a CFD to be valid there must be a broker and a client.

In recent years, CFDs have become the most popular way for online investors to trade commodities, indices, currencies, and stocks. Since CFD trading does not involve the actual asset and operates independent of the market, it allows for greater flexibility than traditional trading — for example, access to foreign markets, leveraged trading, fractional shares, and short selling. Contracts for differences is an advanced trading strategy that is used by experienced traders.

What can you trade with CFDs?

While CFD trading, you can open positions on a variety of different asset classes including shares, indices, currencies, commodities and cryptocurrencies – all within one single platform. A trader can enter the stock market without having to deal directly with share purchases, providing greater liquidity and easier execution. This has the added benefit of being able to profit in a falling market by short selling.

Trading CFDs is one of the very few ways to gain access to the indices market. CFDs on indices mirror the composition of a certain index. The FX market is suited to CFDs and leveraged trading due to the relatively small price movements that occur in these markets. Remember to employ risk management techniques when trading at all times and be even more cautious of assets that have a history of being highly volatile like cryptocurrencies.

• Shares and stocks: You can trade CFDs of shares of companies in the market. This means you can buy the stock of a company by predicting that its price will fall or rise without owning the company’s stock. Stocks comprise the largest category of CFD because of the numerous stocks available throughout the world
• Index: In trading, it is the measurement of the day-to-day performance of a country’s stock market. Perhaps you may have heard of FTSE China A50, China H-Shares, US Dollar Index, and Hong Kong HS50 Cash Index. These are popular stock indices that most traders trade in the CFD market. Trading tools such as data and analytics and market news are essential when trading index.
• Bonds: Companies or government debts issue these in exchange for funds borrowed. At times, they are called treasuries or Treasury Bills. Bond prices have an inverse connection with stock market indices. Euro Bund, UK Long Gilt, US 10yr T-Note are the most popular in the CFD market.
• Commodities: These are categorized as soft or hard commodities. In most trading platforms, they are divided into agricultural commodities (wheat, sugar, cocoa, cotton, coffee, corn, etc.), energy assets (natural gas, crude oil) and metals (palladium, platinum, copper, silver, gold, etc.) These commodities are raw materials used in various industries in the world, with their prices varying. Additionally, they are the most traded in the CFD market and are very volatile.

Equivalence of CFDs and Forex

CFD trading and Forex trading have many similarities. First, both types of trading involve a similar trade execution process. Traders can easily enter or exit the market in both rising and falling markets. Second, both CFD trades and Forex trades are executed on the same platform, using similar looking charts and pricing methods. In both cases, trades are executed in the over-the-counter (OTC) market, which is run entirely electronically within a network of banks, with no physical location or central exchange. Another similarity between CFD trading and Forex trading is that the only cost of trading is the spread, as opposed to other types of trading instruments that charge commissions and other finance fees.

The primary similarity between CFD trading and forex trading is that the trader doesn’t actually have ownership of the underlying asset. When one buys EURAUD, for instance, one is not actually purchasing Euros and selling Australian dollars; rather the trader is simply speculating on the exchange rate. Likewise, when a trader purchases a CFD contract on the FRA40, the trader does not actually own the stocks in the FRA index, but rather is speculating on its underlying price. In many ways, forex is simply another kind of CFD.

Difference between CFD’s and Forex

The main differences between CFD trading and Forex trading is that CFD trading involves different types of contracts covering a diverse set of markets, such as indices, energy, and metals, whereas Forex offers pure currency trading. When you trade CFDs, you have the opportunity to select different contracts that vary in increment value and currency type, depending on the country in which the underlying asset originates. Forex trading is about trading one currency against another currency and always involves trading in uniform lot sizes.

A final difference between CFD trading and Forex trading relates to the general factors that tend to influence the different markets. CFD trading is mostly influenced by specific factors, such as supply and demand of a given commodity or trend changes associated with business sectors. Forex trading on the other hand is mainly driven by global events, like large employment shifts or international political changes.

Have a Smart Plan about your trading 

A trading plan gives you a clear path to follow in your trading journey by outlining the why, what, when, and how. Knowing all these factors before jumping into trading helps you avoid trading on emotions, which can lead to making uninformed decisions that will likely translate into losses. A trading plan needs to cover some important aspects:

• Your motivation for trading supported by realistic and clearly-defined trading goals
• Trading style and risk appetite
• The assets you want to trade. Don’t expect to specialize in trading all the available asset classes.
• How you will finance your trades and how much capital you will use.
• Trading strategy with clear rules for trade entry and exit, and risk and money management.
• Record keeping

A good plan will give you an excellent structure for your day-to-day trading decisions.

Choice is yours

We won’t advise you as to which market you should actually choose, because it should depend on your own analysis of any given asset’s potential. What’s important to note here though is that there are virtually innumerable assets that can be traded via CFDs. These include typical stocks, commodities, forex pairings, and now digital currency as well. While CFDs and forex have many similarities, they also have their key differences. By knowing what makes these two different, investors can make better-informed decisions and decide how best to incorporate CFDs and forex into their trading strategy.

Happy trading!!!