CFD is an acronym for ‘Contract for Difference’. A CFD is a type of derivative, which means that its price is derived from the value of an underlying asset. These underlying assets can include currencies, commodities, indices and shares. CFD traders never actually own the underlying asset itself, but instead speculate on the movements of its price.
In a Contract for Difference, two parties agree to exchange money based on the change in value of the underlying asset, between the point at which the deal is opened and closed. A CFD trader can make money both from an upwards or downwards swing in price. If the value of the underlying asset increases then the buyer makes money, and if the value falls the buyer loses money. Inversely, the seller will make money if the asset falls in value and lose money if it increases in value.
Who is the contract between?
CFDs can either be traded ‘Over the Counter’ (OTC) or through an exchange (Exchange Traded CFDs). ForexCT offers an OTC CFD service, which means that the Contract for Difference is made between the trader and the broker – in this case, ForexCT.
CFD traders can magnify the size of their trades by using leverage. When opening a trade the trader will put forward a certain amount of their account called the margin, and the broker (such as ForexCT) will put forward a larger ‘loan’ amount to increase the trade’s notional position. Note that leverage can significantly amplify losses as well as profits, so it’s wise to employ risk management strategies such as stop losses and take profits.
What are the differences between trading CFDs and Forex?
Forex, or foreign exchange trading, involves trading currencies against one another. This can either be a spot trade, where traders exchange cash for the currencies themselves, or a CFD trade, where traders speculate on the price movement of the currencies. ForexCT offers the second type: CFD trading for Forex and other financial instruments.
CFD and CFD Forex trading are both carried out without the exchange of the asset itself, and leverage can similarly be used to increase the size of trades. However, there are some noticeable differences between the two. Forex is traded 24 hours a day, 5.5 days a week on various exchange markets worldwide, while various stocks, commodities and indices are traded via different markets and hours. Another difference is that of the key factors that affect CFD asset and Forex prices. While commodity CFD trades are directly affected by supply and demand factors, currency values can be significantly affected by changes to central bank policies and key economic indicators such as interest rates.
Why trade CFDs with ForexCT?
- Trade with an ASIC regulated broker that’s based in Melbourne
- Hone your strategies with help from your dedicated account manager.
- Contact our team directly through your CFD trading platform, 24/5.
- Make the most of included webinars, video tutorials and resources.