Contract for difference (CFD) trading is a popular approach among many traders and it can be applied to a variety of different financial instruments. This includes: shares, bonds, commodities, metals, energy, indices, stocks and foreign exchange (forex).
The forex market is one of the most active in the world and almost $6 trillion dollars’ worth of transactions take place on a daily basis. There are many benefits to trading on the forex market using CFDs and you could start CFD trading on Skilling for example, and experience some of them for yourself.
If you’re new to the world of forex trading and are wondering what a forex CFD is, then we will enlighten you in this article and explain how they work.
What is a forex CFD?
A CFD is a contract for difference, and as the name suggests, it is a contract that is made between an investor and an investment broker, and can be used to open a position in the forex market. An agreement is made between the two parties, that states that the difference between the opening and closing price of a trade will be exchanged, once the contract has come to an end.
How does a CFD work?
One of the main features of any CFD is that it allows you to invest in an asset, opening a position in the market without owning the underlying asset itself. For a CFD, there is a buy and sell price which can be marginally different from the asset’s market value. The difference between this buy and sell price is known as the spread, and when undertaking CFD analysis, this can be used to help to predict future price fluctuations in the forex market.
CFD trading is actually very similar to standard forex trading, especially in terms of the strategies that can be applied. One of the most significant benefits of using forex CFDs is the fact that they enable you to trade on leverage, as well as the ability to buy or sell if you expect that prices will rise or fall. What’s more, stamp duty does not apply to forex CFDs meaning they are a more tax efficient trading option.
Trading forex CFDs
Trading on the forex market specifically using CFDs, will enable you to open a position without owning the currencies. What you will own however, is the contracts related to the indexed price of the traded currencies. This enables you to trade in some of the most widely used, influential currencies in the world without being met with a variety of different legislative structures.
What will I have to pay on forex CFDs?
As previously mentioned, you will not have to purchase the underlying asset itself, but what you will be required to pay is the spread, which is the difference between the buy and sell price. The smaller the spread, the more likely that you are to make a profit, since the price won’t have to shift so dramatically in order to move in your favour.
Many traders choose to implement forex CFDs into their trading strategy. One of the reasons for this is that you can use an existing CFD account to trade in a multitude of different financial instruments. Therefore, if you already trade in the stock market using CFDs, you can use this same account to open a trade in the forex market.
It’s also possible to utilise hedging when CFD trading, which enables you to protect your position when you own a currency pair in the traditional sense, by taking an opposite position in the same pair with a CFD.