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CFDs vs Futures vs Forex Currency Contracts - Financial Trading Instruments

 

1. What is Forex -

The exchange trade of one currency for another for purpose of speculation and getting a profit from this speculative transactions. Currencies are traded in contracts called lots.

Traders buy a currency it goes up they make profit, it goes down the make a loss.

 

2. What is a CFD -

This stands for Contract For Difference, this is a financial instrument or a contract used to trade in commodities such as Gold, Oil, Natural Gas, Cocoa, Coffee without necessarily having these commodity items in your stock. This is an agreement between a buyer and a seller stating that one party will pay the other party the difference between the current price and the price at the time of contract.

Traders buy a CFD it goes up they make profit, it goes down they make a loss.

 

3. What is Futures -

A contract that specify the purchase or Sale and the purchase price of the underlying commodity at a Future Date.

At the specified Later Date:

The buyer - Agrees to get the specified commodity delivered to them and pay for the commodities delivered

The seller - Agrees to deliver the specified commodity and get paid for delivering

 

A trader wants to buy and sell and speculate to make profits between these dates, otherwise if you forget and you do not close your futures contract before this delivery date, you will get the goods delivered to you and you will pay cash for them, that is why most broker will automatically close your these contracts one day before this delivery date.

 

CFD vs Forex - Similarities

There are various similarities that exist between these two

  1. Both the Forex market and CFD market, profits are made from speculation where traders seek to gain profit from the quote difference of the exchange rate in Forex and commodity price for CFD.
  2. Both are Leveraged, and traders trade on margin.

 

Similarities in the profit trading methods, there are two ways to profit from CFD trading and fluctuation of these commodities


Buy the CFD when it is low and then sell it when it is high
Sell the CFD when it is high and then buy it when it is low

This is the same for Forex currency trading where traders:

Buy the currency when its exchange rate is low and then sell it when the exchange rate goes high
Sell the currency when its exchange rate is high and then buy it when the exchange rate goes low

 

 

CFD vs Futures - Relations and Differences

 

Relation

The CFD volumes, number of tick volumes, and the quote is based on the relevant parameters flowing from the Futures contracts.

 

Contracts for Difference are more accessible to investors and traders more than Futures market because the trading lots that can be used to trade CFDs are less than those used to trade Futures. For Example if the 1 Futures lot for Crude Oil is 1000 barrels, for CFDs the minimum lot may be 100 barrels. This makes Contract for Differences Trading more popular in comparison less capital is required for trading CFDs.

 

Differences


CFD

 

What is CFDs?

CFD stands for Contract For Difference, this is a financial instrument or an agreement used to trade in commodities such as Gold, Oil, Natural Gas, Cocoa, Coffee without necessarily having these commodity items in your stock. This is an agreement between a buyer and a seller stating that one party will pay the other party the difference between the current price and the price at the time of contract.


CFD contracts are traded in an Over The Counter market

Specifications are determined by a broker and vary from one broker to another

CFDs do not involve any time limits on trading

Do not involve the physical delivery of goods - Only the difference in prices is settled

 

Futures

 

What is Futures?

It is an agreement specifying the purchase or sale of the underlying commodity at a future date. The buyer of the contract undertakes to accept the commodity and pay for it while the seller of the contract undertakes to deliver this commodity and get paid money for delivering it.

Contracts is where both parties in this transaction fix the price of an asset that is to be delivered by the seller to the buyer in the future.

Futures contracts are traded on an exchange market

Specifications are strictly standardized and the same everywhere

Futures have an expiry date; when delivery of these asset is expected

Involve both the physical delivery of an asset (The asset delivered may also be in Cash Form ) and cash settlement - Cash settlement - the difference between the price at the start time and that at closing price of the commodity during the time of expiry is settled.

 

Example of These Financial Instruments

Forex Currencies - EURUSD, GBPUSD, USDCHF, USDJPY

CFDs - CFDs on Stocks, Metals, Currencies, Commodities and Indices

Futures - Gold, Oil, Natural Gas, Cocoa, Coffee

 

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