broker example

LIVE CHAT

SUPPORT : +44 (0)203 195 3855
Suite 1567, Kemp House, 152-160 City Road, London, EC1V 2NX, U.K
support@indexpips.com

Quick contact form





key differences CFDs vs Forex Trading

Below is an example of the key technical differences between CFD’s, Forex trading.

Examples of trade sizes and notional value examples

A key difference exists between the different types of trading when we talk about the how the trade size correlates with the trade notional value. With forex trade quantities these are placed in lot sizes whilst CFD’s are by the amount of CFDs.

CFD trade sizes

On the other hand, if with the same company which is priced at 250p you take the same long position through a CFD trade, you could buy 1000 CFDs.

This means that you will lock in profits alongside a rally in shares in the company. Your total profit (or loss) will then be calculated as the difference between the opening and closing values of the contract.

The notional value of the CFD Trade is £2500 (1000 CFDs x 250p).

Forex trade sizes

Forex trades work in a different way to spread bets and CFD trades. In forex trading each trade is placed per lot size, a typical lot size is 10,000 for either buying or selling a currency trade.

Let’s say for example that you want to buy EUR/USD as you believe that the Euro will strengthen against the US dollar. You decide to buy 1 lot of 10,000 at an indicative price of 0.9900. For each 0.0001 that the EUR/USD rate rises you will make a gain of 0.0001 × 10,000.

The notional value of the trade is 9.900 US dollars (10,000 × 0.9900).

Leveraging

Margins are also calculated differently across the three trading products.

CFD trades

With CFD trades the initial margin is a fixed percentage of the notional value.

To illustrate this point; let’s say you place a buy CFD trade of 1,000 on a company’s shares where the price of the company is currently being traded at 549p and which has an initial margin rate of 10%. Your initial margin charge would be £549 (1,000 × 549/10%).

Forex trades

The margins are calculated for forex trades somewhat differently to CFD trades. In forex trading you choose the specific leverage ratio for example: 100:1.

This ratio then determines how much margin you will be charged on your trade. As you have the capacity to choose the ratio at which you trade you have greater control over your trading.

For example; if you buy 10,000 of EUR/USD which is trading at an indicative price of 1.45670 and you choose a leverage of 100:1 you would be charged an initial margin of $145.67 (10,000 × 1.45670/100).

The leverage ratio is key to determining how much margin is charged when you trade and by being able to dictate the leverage you hold in a forex trade you hold a lot more control over your trading.

Ready to trade? Click here to get started