Forex contract - what is it?
A Forex contract is a tool through which a trader can profit from changes in the price of the underlying asset, while it does not matter if the price falls or rises. A Contract for Difference (CFD) is a derivative contract that is a convenient and efficient mechanism for trading the underlying asset that underlies it. The underlying asset may be futures, bonds, stocks, but Forex is the currency.
The contract for difference was originally a British exchange instrument, it allows you to work on the market not with specific indices, stocks, goods, currency, but with contracts that display the change in prices of the underlying asset. Such a contract can conditionally be considered as the acquisition of shares through a loan.
It turns out that the buyer of CFDs can get all the benefits of the respective shares, including price increases, but for this the seller pays the cost of the loan. This is borrowing funds from the bank for the purchase of shares, when the investor receives the benefits of owning shares, while the bank receives interest. In CFDs, this is combined into one transaction.
The Forex contract becomes an ideal tool for those who want to work in the market, but do not have such an opportunity (due to lack of funds, for example). By trading CFDs, the trader will be able to extract from the work the same financial result as when working in the underlying asset market.
At any time, a trader can conclude a Forex transaction in full. A contract for difference is a marginal product, since contract transactions are carried out according to a scheme similar to the scheme for concluding transactions on Forex, with the provision of leverage. This increases the attractiveness of this type of trading for private traders and investors.
The foreign exchange contract for difference displays the movement of the currency price. As in the case of buying shares, the trader’s profit is the difference between the sale and purchase prices, but short sales are quite possible on the CFD market, due to which the profit can be obtained both from increasing the value of the currency and from lowering it. The usual margin trading on Forex does not give such an opportunity.
Holders of contracts for difference, unlike those who hold shares in corporations, do not receive dividends, but the adjustment for the dividend is taken into account. Correction is carried out in the presence of open positions on the day the registry is fixed. If the position is long ("bought"), the correction amount is accrued; if it is short ("sold"), it is written off.
Among the advantages of working with contracts for difference, it is worth highlighting such as low requirements for the volume of contracts and collateral, the ability to trade CFDs and the Forex market from one trading account, the possibility of short sales, the full execution of contracts, low margin requirements.
The disadvantages of this type of trade are the large risks that arise directly from the very conditions of margin trading. When giving a large leverage, the Forex contract may involve large losses (as well as income).