Forex and CFD trading is regarded with special approval by their traders and is thriving fast in the financial markets. However, they both vary due to specific critical differences between them. If you are interested in learning the key differences between forex and CFD trading in Australia and which trading type is best for you, this article is the ticket for you.
Table of Contents
What is Forex Trading?
Forex trading, also called foreign exchange trading, refers to trading various international currencies in the decentralized financial market. Traders buy and sell these currencies to turn a profit for them. Simply put, traders enhance the odds of success in the market by purchasing a currency during inflation and then selling it during deflation. Being decentralized, this trading typically takes place between financial institutions and individual traders. Forex trading can be done digitally, through several electronic trading platforms, or on home computer screens with the help of a forex broker, so choosing a reliable professional from the forex brokers list you find online is worth considering.
What is CFD Trading?
CFD trading, also dubbed Contract for Difference trading, is the buying and selling of financial contracts for differences or contracts for differences. This means traders can buy one contract in the underlying asset, and if that market increases by a certain amount, they can sell it to make a profit. CFD traders can speculate on many different commodities, indices, currencies, and stocks in this way. CFDs are traded via the best trading platform in Australia that is regulated by the Australian Securities and Investments Commission or the ASIC.
Comparing Forex and CFD Trading: Understand the Key Factors
Unlike Forex trading, CFD trading does not entail traders purchasing and selling any underlying asset. Still, they have to sign an agreement with a CFD broker while giving their consent to disburse the differences between the opening and closing prices of the deal.
One common thing between Forex and CFD trading in Australia is that they both are regulated by the Australian Securities and Investments Commission (ASIC). That being said, traders can enter both types of trading confidently without concerning the odds of any potential fraudulent activities taking place with them. However, it is worth noting that the level of regulation is very likely to vary depending on the location you are trading from. After all, the location may affect a reliable forex brokers list you find online. Therefore, before you get down to either of the trading types, check with a regulatory body well.
Forex and CFD trading vary mutually in one aspect: leverage level. Leverage in trading is a risk management strategy that rewards investors for taking additional risks to earn higher returns.
The level of leverage of Forex trading, in general, is better than CFD trading. This means that traders can assume and manage a higher position by using fewer funds, but it also poses a higher level of risk. Hence, investors should use proper money management techniques for high leverage levels. It is also worth noting that both types of trading offer the same profit and loss percentage per trade.
Forex and CFD trading again vary mutually in terms of taxation. In Australia, forex trading is considered a capital gain, implying that any profits gained are subject to capital gains tax. To get tax relief, forex traders must enter into short-term trading arrangements in two ways: as trades made for profit-making or as hedges for foreign exchange risk.
On the other hand, CFD trading is considered income, implying that any profits gained are subject to be paid (in a certain amount as deductions) under income tax regulations in Australia. It is up to you whether you want your forex and CFD investments taxed as capital gains or other income if that is something you feel would benefit you. To get a complete understanding, it is worth consulting a tax professional to understand the tax regulations of forex and CFD trading in the country.
Forex and CFD trading are the two fast-thriving trading types in the financial markets but vary due to specific vital differences. Forex trading involves trading or execution of various global currencies, whereas CFD trading requires traders to speculate on the price fluctuations of different financial instruments.
The ASIC regulates both trading types. So depending on your preferences and discretion, you can get down to either of them, giving scrupulous attention to the level of leverage, tax deductions, regulations, etc.