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All You Must Know About Forex And CFD Trading

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This article is published in collaboration with Scutify, where you can find real-time markets and stock commentary from Robert Marcin, Cody Willard and others. Download the Scutify iOS App, the Scutify Android App or visit Scutify.com.

Forex and CFDs can both be traded but that doesn't mean they are one and the same. They involve different risks but it is true that both need capital to trade. Forex and CFDs are the notable in the trading types in the work apart from stock exchanges. Whichever you would want to start trading with, the first hand information of initial investment and risk profile involved for trading in either should be first known before taking the plunge.

Individuals having lesser capital can opt for forex trading and persons with higher capital in hand can trade on CFDs. It should be noted that both trading markets are volatile and and there will up and downs where both don't have any special advantage at all. Both the transactions happen over the counter. The best part of trading either in forex or CFDs, you could trade when the markets are upswing or are downturn. Calling long or selling short during these periods will not effect the traders of Forex & CFD.

Knowing CFDs

CFDs are the difference in the opening and closing prices of the assets which the seller has to pay. If the difference is in negative, it's the buyer who will be paying instead.

In this case

  • You don't have to own the shares to trade them.

  • You will get your dividends in the way as persons owning the shares.

  • You will allow receive price performance

Why CFD trading is better than trading in shares

  • You could do margin trading with on 10% of the whole deal.

  • The commissions are really low compared to other trading markets.

  • The good thing of CFDs, you don't have to previously buy the share but buy the equity and sell too when the market goes down.

  • Unlike shares, there is, no requirement of stamp duty.

  • Trading risks can be managed using stop loss.

  • The trading orders are executed faster.

CFDs are used trade various financial instruments such as equity indexes and commodity futures. They are a great way of speculating market without actually owning the underlying assets.

Foreign exchange trading

This trading can be simply put as buying one currency using another currency. The buying currency is known as base currency and the selling currency is known as the quote currency. If the base currency strengthens, the market rises and if it weakens the market falls accordingly. If the market does rise you could go long or if you feel it will fall you could sell short. The movement in the forex trading will depend on you selling long and short which becomes the determined nag factor for making a profit or loss.

The factors that influence the forex market

This market is as volatile as it gets with many factors that influence it

  • The financial situation of prominent countries whose currencies are trade most, oil reserve countries can make a huge impact on the currency exchange rates.

  • The change in the interest rates of the a particular country, the announcement of the budget and unemployment problems can affect the forex rates too.

  • The economic conditions of a particular country have an impact on the forex rates, the stronger or weaker the economies will make the currency shift up or down.

  • Major catastrophe such as natural disasters caused by earthquakes, tsunami or even man made such as bombings can result in forex rates plummeting.

The characteristics of a forex market

  • It is the largest asset class in the world.

  • It is most liquid in the trading market,

  • It has a huge trading volume.

  • It covers a large geographical area.

  • There can be 24 hour trading.

  • The margins of relative profit are low compared to the fixed income.

  • There is use of leverage to enhance profits.

  • It is considered the ideal market for perfect competition.

Here is a breakdown of what can be done in a forex market

  • There are options

  • There are outright forwards.

  • There is currency swaps

  • There is foreign exchange swaps

  • There are spot transactions

The interbank foreign exchange market, securities dealers and commercial banks form the largest chunk of the forex trading market with 51%of the trading under their belt. The hedge funds, institutional investors etc. dabble in the forex market to bring down the risk. The multinational companies have to trade form bringing in the goods to selling depend on forex. The banks are into forex to keep the money supply intact, interest and keep a check on the inflation rates.

There is foreign exchange fixing done by each country to indicate the market trend which is done by the national banks which the central banks follow suit. Investment firms use foreign exchange to trade in foreign securities. Exchange rates can be extremely sensitive to international purchasing power parity which differs from country to country to economic conditions. The balance of payments in respect to tradable goods and services that can be provided by one country to the other. Since forex is a biggest asset market it is considered to make good investment portfolios.

Low investment: Online forex trading doesn't require you to have a huge sum as your barrier level amount. You can start trading with a minimum amount. You can increase the amount as you get a feel of the system and you become more confident in online trading.

There is no commission: In online forex trading, there is no commission to be paid and the brokerage too that is paid to the broker when you make a profit is much lower than any other market.

There is always a fight to get hold of stronger currencies and think them to be the safe haven. It has been noticed that there are times when currencies can be over sold or over bought due anticipation of rumours and not focusing on the real pricing of the currency. Certain traders follow patterns in trading for certain currencies which relatively don't change much which are referenced by price charts.


This article was written by Adam Monson for on .

This article published in collaboration with Scutify, the best app for traders and investors. Download the Scutify iOS App, the Scutify Android App or visit Scutify.com.

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