If you want to trade forex, then CFD forex vs. spot trading is a decision you’ll need to make. Which one is best for you will be down to your own appetite for risk, as well as your trading goals.
Both CFDs and spot trades are a way of trading the foreign exchange (forex) market, where traders seek to profit from changes in exchange rates between currencies.
All forex trades are done as part of a ‘pair’, which means you are always trading one currency against another.
Common pairs include:
But there are a lot of different pairs available to trade.
The first currency in the pair is known as the base currency, with the second currency known as the quote currency.
In a forex trade, you’re always trading the price of the base against the quote.
So, in a GBP/USD pair, you’re trading the price of the US dollar against the UK pound sterling.
In GBP/EUR, you’re trading the price of UK sterling against the Euro, and so on.
By placing a spot trade, you simply buy and sell your chosen currencies at their current price, in cash.
Then, if the price moves in your favour, you can profit from it.
Let’s take a look at a GBP/USD forex spot trade example:
Say the exchange rate is £0.8 sterling for each dollar.
You buy $5,000 for a price of £3989.40. (0.8 of $5,000.)
The exchange rate changes to £0.9 sterling per dollar.
So, you sell your dollars, and in return you get £4,500.
You started with £3989.4, and you’ve received $4,500 in return.
This means you’ve made £510.6 in profit on this trade.
Had the exchange rate fallen to £0.7 sterling per dollar, you would only have received £3,500 back, and lost £489.40 on the trade.
If you have enough capital to make this kind of trade, forex spot trades can be an effective way to trade the markets.
CFD stands for ‘Contract for Difference’. This means that you and a broker agree to exchange the difference (hence the name) between the price of a forex pair when the contract opens, and the price when it closes.
When you trade CFDs, you don’t actually buy the currencies. You simply speculate on the price movement, and don’t ever own either currency in the pair.
The price of the CFD pair should roughly correlate with the real price pair, though there may be a slight difference depending on market conditions at the time.
So, why would you choose forex CFDs over simply buying and selling the currency for real?
There are a few things to consider here:
Whatever option you choose to use, the two most important things you need to consider are:
Risk Warning: this article represents only the author’s views and is for reference only. It does not constitute investment advice or financial guidance, nor does it represent the stance of the Markets.com platform.When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients.
LKQ Corporation (NASDAQ: LKQ) has recently hit a 52-week low, raising concerns among investors and market analysts.
Intel Stock (INTC) Slides 7%: Intel Corporation (INTC) has long been a cornerstone of the technology sector, known for its innovations in semiconductor manufacturing.
Deckers Stock Surges Today: Deckers Outdoor Corporation (DECK) has recently experienced a significant surge in its stock price, drawing attention from investors and traders alike.
set cookie