What is Forex: Different Ways To Trade Forex
Because forex is so awesome, traders came up with a number of
different ways to invest or speculate in currencies. Among these, the most
popular ones are forex spot, futures, options, and exchange-traded funds (or
ETFs).
Spot Market
In the spot market, currencies are traded immediately or “on the
spot,” using the current market price. What’s awesome about this market is its
simplicity, liquidity, tight spreads, and round-the-clock operations. It’s very
easy to participate in this market since accounts can be opened with as little
as a $25! (Not that we suggest you do) – you’ll learn why in our Capitalization lesson!
Aside from that, most brokers usually provide charts, news, and research for
free.
Futures
Futures are contracts to buy or sell a certain asset at a
specified price on a future date (That’s why they’re called futures!). Forex
futures were created by the Chicago
Mercantile Exchange (CME) way back in 1972, when bell bottoms
and platform boots were still in style. Since futures contracts are
standardized and traded through a centralized exchange, the market is very
transparent and well-regulated. This means that price and transaction
information are readily available.
Options
An “option” is a financial instrument that gives the buyer the
right or the option, but not the obligation, to buy or sell an asset at a
specified price on the option’s expiration date. If a trader “sold” an option,
then he or she would be obliged to buy or sell an asset at a specific price at
the expiration date. Just like futures, options are also traded on an exchange,
such as the Chicago Board Options Exchange,
the International
Securities Exchange, or the Philadelphia Stock Exchange.
However, the disadvantage in trading forex options is that market hours are
limited for certain options and the liquidity is not nearly as great as the
futures or spot market.
Exchange-traded Funds
Exchange-traded funds or ETFs are the youngest members of the
forex world. An ETF could contain a set of stocks combined with some
currencies, allowing the trader to diversify with different assets. These are
created by financial institutions and can be traded like stocks through an
exchange. Like forex options, the limitation in trading ETFs is that the market
isn’t open 24 hours. Also, since ETFs contain stocks, these are subject to
trading commissions and other transaction costs.
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