14th July 2014
Over the last decade, trading in financial markets has developed rapidly. Technological breakthroughs have brought the fascinating world of trading to individual traders’ fingertips. Investors enjoy access to a wide range of financial instruments, giving them countless investment opportunities.
With so many financial instruments close at hand, newcomers often find it challenging to select a trading market that is suitable for them. Currently, Forex and CFD markets are two of the most preferred trading arenas, offering high liquidity and vast profit-making possibilities.
Nevertheless, in order to make a well-informed decision on what financial instrument to trade, you need to fully grasp what the Forex and CFD markets are all about.
Foreign exchange market, or commonly referred to as Forex, is the world’s largest financial market, with a daily trading volume of more than $5 trillion. The bulk of Forex transactions is the result of the currency exchanges that take place from businesses around the world on a day-to-day basis. With such a heavy transaction volume, Forex offers endless trading opportunities for investors to speculate on the fluctuations of currency rates.
Due to the fact that the Forex market is over-the-counter, currencies can be traded in whatever market is open at any given time, enabling investors to buy and sell currencies 24 hours a day, 5 days a week, thus offering great opportunities to profit on currency flows and market volatility.
The financial instruments involved in Forex trading are currencies. Investors can trade all major currency pairs (e.g. EUR/USD, USD/JPY, GBP/USD, etc.), as well as other minor and exotic currency pairs (e.g. AUD/CHF, EUR/NOK, GBP/DKK, etc.). They pick a currency pair and estimate whether the relative value of the base currency – the first currency of the pair – is going to rise or fall compared to the quote currency – the second currency of the pair. For example, if you reckon that the price of EUR will rise against the USD, you can buy EUR/USD by placing a long position. But, if you think that the price of EUR will fall, you can sell EUR/USD by placing a short position. As soon as the price hits the level you want, you close the position, thus making a profit.
The value of a country’s currency is affected by economic, global and political factors, such as inflation rates, interest rates, large employment shifts, output, seasonal capital flow patterns, political stability, international policy changes and many others, which in turn affect the value of the currency pair.
CFD is the abbreviation for Contract for Difference. It is an agreement between two parties, determining the settlement of the difference between the opening and closing price of an underlying asset at the close of the contract. It is an over-the-counter financial instrument that involves, apart from currency trading, commodities, indices, shares, futures and other instruments trading.
Commodities are financial instruments that reflect the price movement of a set amount of a commodity, like gold, silver or oil. Commodities prices fluctuate over time, based on the supply and demand of the particular asset, leading to volatile price changes and increased opportunities to speculate on its price movement.
An index represents the value of a major grouping of shares and stands as a yardstick for the group’s overall performance. Indices are affected by various factors, such as economic data and the performance of other indices. By trading indices through CFDs, you can take advantage of broad market movements with a single trade.
Shares are amongst the most widespread financial instruments. Trading shares through CFDs allows investors to place short or long positions on a specific share, without physically owning the share. If you think that a stock price will drop, you can make a short position or make a long one, if you think that the share’s price will increase.
Future contracts involve the purchase or sell of a particular financial instrument at a predetermined future date and price. Future contracts give the ability to investors to profit from the price margin of an asset, before the determined closing date. The futures market is considered to be amongst the most liquid, with heavy volumes being traded on a daily basis.
CFDs offer the opportunity to speculate and diversify your trading in different financial markets, without actually owning the underlying asset. Both short and long positions can be opened, depending on whether the investor has a bearish or bullish sentiment with regard to the financial instrument.
Lucrative Financial Markets
Despite their key difference, which lies to the fact that CFD trading gives you the ability to trade a broader range of financial instruments, rather than just currencies, Forex and CFDs have many similarities. They are both over-the-counter and they involve an identical trade execution process. Investors can easily enter and exit the market and make profit in both increasing and decreasing markets, through the placement of long or short positions. Trades are performed on the same trading platform, using similar charts and pricing methods, and investors can use leverage to place their trades. But their greatest similarity is that both Forex and CFD trading can bring considerable profit opportunities to traders, through an easy and straightforward process that maximises their trading potential.