Forex (foreign exchange) refers to the online market for trading foreign currency and foreign currency derivatives. Unlike the equity market, the Forex market has no centralised location. Instead, exchange prices are established on the inter-bank network where large banks, funds, and liquidity providers can buy and sell currency. It is the largest market globally in terms of daily turnover, and it trades 24 hours a day, 5 days a week.
CFDs (contracts for difference) allow traders to gain exposure to an underlying asset without owning it directly. CFDs are similar to derivatives where the price is derived from an underlying asset, and the investor can buy or sell a CFD depending on their view of where the price is headed.
Both CFD and forex trading avoid the transfer of physical assets. They both trade over the counter (OTC), meaning that their transactions are decentralised and take place through a network of financial institutions. Their trades are also typically executed the same way.
Forex and CFDs are similar in the sense that they both trade OTC (over the counter) instead of on an exchange like the ASX, and each product can be traded via the same platform with most brokers. Forex and CFDs both offer traders access to margin trading or leverage, which allows investors to trade a multiple of the funds they have on deposit with the broker, which can amplify gains or losses.
