Everything you need to know about forex CFDs

Investing in the foreign exchange (forex) market is now simpler than ever, since you can speculate on the world’s major currency pairs on an online trading platform.

If you’re wanting to open a position in the forex market and diversify your portfolio, then a contract for difference (CFD) can be an optional route to take. You can use CFDs to trade in some of the most popularly traded securities, including stocks, bonds and currencies. Since you can use the same account to trade on different markets, it can simplify the portfolio diversification process.

In this article we will explain what CFDs are and how you can use them to trade in the forex market to maximise your returns on investment.

Read on to find out more.

Trading forex

Before we explore CFDs, let’s first take a look at how forex trading works. When trading in forex, you’ll be buying and selling in currency pairs. There are two currencies that are traded alongside one another, enabling their value to be deduced by directly comparing them against one another.

For example, the most widely traded currency pair is the euro against the US dollar (EUR/USD) and in this instance, the euro’s value is determined by how many dollars it would take to purchase one euro. In a currency pair, there is a base and a counter, or quotecurrency. In this example, theeuro acts as the base whilst the dollar represents the counter.

The value of a currency pair is highly susceptible to change, because the market is extremely volatile and influenced by a range of different factors. One of the primary factors that can cause a currency pair’s value to fluctuate is the economic health of a nation, since the two are intrinsically linked.

Before investing in the forex market, it’s important that you understand all of the factors that can induce price changes, and also have a developed understanding of how to use fundamental and technical analysis to inform your trading decisions.

What is forex CFD trading?

A forex CFD is a contract made between a trader and a forex CFD broker. This is an agreement that you will exchange the difference in value of the contract from the start of trade to its close.

This means you can trade in the forex market without owning the underlying asset itself, because instead, you will trade upon the value of the contract. This is beneficial as you can open a position, and potentially profit on both a rising and falling market, since the price of a forex CFD will mirror the underlying asset.

The benefits of forex CFD trading

One of the most significant benefits of trading forex CFDs is that you can use leverage. This means that you can open a position in any currency pair, without having to deposit the total value of that trade.

Instead, you will provide a portion of the trade’s value and borrow the remaining capital from your chosenforex CFD broker. You can access leverage on Skilling, for example, and this will enable you to access greater exposure to the asset without having to spend so much of your own capital.

Another advantage of trading forex CFDs, is that you’ll be exempt from having to pay Stamp Duty or Capital Gains Tax. This is because you do notown the underlying asset when CFD trading, and are therefore not responsible for the legal charges or tax liabilities that apply.

With any investment however, we recommend that you always check whether tax will apply to your trade, asthis can depend upon your individual circumstances.

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By trading forex CFDs you will be able to speculate on some of world’s major currency pairs, without owning the asset itself. This will allow you to explore a whole range of benefits, helping you to reach your financial goals.