If you want to understand how CFDs are different from forex and stocks, then you are in the right place. When it comes to the primary reason that differentiates CFD trading from forex and stock trading, you should know that it comes down to what you trade.
For instance, with CFD, you do not own the asset that you are trading on, but you exchange the price difference between the opening and closing trading positions.
Read on to learn more.
CFD Trading – What Is It
Starting with what is cfd trading, you should know that it stands for “contracts for difference” and involves leverage. What this means is that with CFD trading, you can borrow money from your potential broker to open trading positions. If the trading position remains open overnight, you will be charged an interest fee or credited an interest fee, depending on whether you have opted for a long or short trading position.
You should know that with CFD trading, you do not own the asset, but you trade the price changes, specifically the “difference” of the price. Using your analytical skills, you can make money by speculating on the price fluctuations of your underlying asset without actually owning it.
Forex Trading – What Is It
Now, when it comes to forex trading, it is essentially the process of purchasing and selling international currencies on the global market. With forex trading, your focus is on exchanging one national currency for another. With that said, you should know that with forex trading, you make money from the fluctuations in the exchange rates of your chosen currencies. Essentially, your aim is to sell a currency at a lower price and sell it for much more.
In simpler terms, you earn the interest rate on the difference of your forex trade. It is crucial to understand the geopolitical factors that affect currency rates to become a successful forex trader.
Stock Trading – What Is It
You might want to consider that stock trading is quite similar to forex trading, with the exception that stock trading involves market or company shares instead of currencies. Now, you can make money with stock trading by selling a share for capital gains, which is also referred to as profit. Nonetheless, you can also make money through receiving dividends, which refer to the portions you receive from the profits of a company that you have invested in.
What Are the Key Differences
When it comes to the key differences between CFD, forex, and stock trading, it comes down to what you trade, the underlying assets, how you trade, and ownership. With CFD trading, you can actually trade a wide range of assets without ownership, including indices, forex, and commodities. Forex, on the other hand, only deals with currencies. Furthermore, stock trading is all about trading company shares.
However, with stock trading, you actually own the underlying stock. On the other hand, with forex and CFD, you do not own the underlying currency or asset, respectively. When it comes to leverage, CFD trading offers high profits but equally high losses. Forex also typically offers high leverage. On the other hand, stock trading does not incorporate leverage, as it requires full investment.
