What is the Difference Between Forex Trading and Futures Trading?
The foreign exchange or forex market is an over-the-counter or decentralized market for the trading of foreign currencies. This market decides international exchange rates for each currency involved in the trade. It includes all elements of trading, buying and selling currencies in current or predetermined prices. This includes: spot exchanges where traders buy and sell currencies at current prices, forward contracts where traders purchase currency on or before a certain date, and spot transactions where traders buy and sell currencies at current prices as they are lowered by the process. It also includes futures and foreign stock exchanges
Unlike the stock exchange, you will find that there are no physical locations where trades are made in forex. Instead, all transactions take place via electronic channels such as the internet. To make a trade in forex, a buyer or a seller (it is commonly known as an investor) both have an account with a forex broker that is either fully automated or partially automated. With the exception of the Internet, the only physical location for the exchange of foreign currency is at the bank where the broker keeps the account.
Unlike other markets, the foreign exchange does not have its own central location. Instead, everything that happens in more happens at the same time, around the clock. This means that when one currency is purchased by another, the difference between the two currencies is known as the spread. Because of this sprawl of trading, it is rare for any particular currency to rise or fall in value against any other currency.
As mentioned above, there are different types of core products such as futures and options, which are traded on stock and commodity markets. But unlike stocks and commodities, the values of foreign currencies are actually rooted in the economic conditions in countries where they are traded. For instance, if you were interested in purchasing a United Kingdom pound (GBP) and were expecting the value to rise against the U.S. dollar in the near future, then you would be buying the U.K. currency. Now, this particular scenario could be compared to the stock market where one currency is expected to increase in value against another in the near future. There are many similarities between the foreign exchange and the stock and commodity markets. For instance, if one country is experiencing economic problems or inflation, it could cause negative effects on the value of other currencies.
Spot forex deals with individual transactions, unlike the futures market which is essentially traded over a period of time. The spot price of a currency is determined when it is actually bought and sold by a trader. Since the spot price is set long before an actual transaction occurs, it is also referred to as a forward position. The forward position is considered risky because the trader may not be able to obtain the profit he expected.
The two types of Forex trading are the spot Forex and currency futures market. Spot Forex deals with foreign currencies and currency futures deal with the commodities. The main difference between the two is that the spot Forex contracts are traded over short periods of time while the currency futures contracts are usually traded for longer periods of time. It has been seen that traders usually prefer currency futures contracts than the spot Forex contracts. However, there are also some traders who consider the spot Forex deals as more profitable.