The first foreign exchange (forex) market was formed in Amsterdam around 500 years ago. This market enabled individuals to freely trade in currencies and from here, the concept took hold. Soon after, international currency trades were taking place. Today, currencies are one of the most actively traded instruments in the world, and each day around $6.6 trillion worth of transactions take place.
The forex market can provide investors with great opportunities to profit, because it is volatile in nature, and investors can take advantage of sudden price movements that occur. However, this volatility also puts your capital at risk, so it’s vital that you conduct thorough research and understand the factors that cause forex prices to fluctuate.
You might also want to consider forex trading through a financial derivative, known as a contract for difference (CFD), as this will enable you to open a position in the forex market without owning the underlying asset. This article will tell you everything you need to know about forex CFDs, so that you can decide whether it’s the right trading approach for you.
How does a CFD work?
As previously mentioned, when trading through CFDs you don’t own the underlying asset, but rather the contract of the currency that you’re trading in. A CFD is an agreement that you make with a broker, that states that you will exchange the difference between the opening and closing price of the currency pair, once the contract has ended.
Although CFDs are popular among forex traders, they are not exclusive to the trade of currencies. In fact, you can use CFDs to trade in a variety of financial instruments including stocks, shares and bonds.
Trading in the forex market using CFDs is beneficial because it allows you to trade, and potentially profit, on both rising and falling markets. Using an online CFD trading platform, you’ll have access to some of the world’s most commonly traded pairs and can speculate on their price movements.
Leverage and CFD trading
Trading in the forex market using CFDs enables you to take advantage of leverage to access additional exposure to a currency pair, without having to fund the whole value of the trade.
This is made possible with leverage trading, by only using a percentage of the total value of the trade that you use as a deposit when opening a position. The remaining capital needed to cover the cost of the trade can then be loaned to you by a broker.
This is beneficial because it will enable you to open larger and possibly more lucrative positions in the forex market, for only a fraction of the total cost of the trade.
How do I trade forex globally using CFDs?
It’s important to note that CFDs are not accepted by all over-the-counter (OTC) markets and cannot be used in the United States. They are accepted in the majority of major European countries though, such as the France, Spain and the United Kingdom. Because they are not universally accepted globally, it’s important that you check each country’s trading requirements before you go ahead with opening a position using a CFD.
Many forex traders choose to use CFDs when trading in currencies as there are multiple benefits to doing so. If you already have an existing CFD account then you can trade in a multitude of different financial instruments, making it simpler to diversify your investment portfolio.
In addition, you can use hedging when trading forex CFDs.This will enable you to protect the capital that you have traditionally invested in a currency pair, by taking an opposite position in the same pair, throughpurchasing CFDs.