Forex vs Futures

Investors today have many choices. Forex trading is a relatively new investment tool, but the traditional standbys of the stock market and the futures market often form the backbone of an investment portfolio. So how does the Forex stand up?

The futures market dates back to the 19th century. At that time, it was primarily a market for agricultural goods which allowed farmers and buyers to contract a selling price for a future delivery date.

Since its origins, the futures market has expanded to include all sorts of commodities in a worldwide market. Futures contracts can be made for agricultural products, manufactured goods, or financial instruments such as currencies and treasury bonds.

Investors who play the futures market are not interested in the commodity, they are only interested in the value of the contract which rises and falls according to the value of the underlying commodity.

Investors must pay a commission on every futures market transaction. The Forex market is different - rather than earning a commission, the Forex broker makes money by setting a spread on each Forex trade. The spread is the difference in price between what a currency can be bought at and what it can be sold at.

Forex Trade Advantages

The Forex market is also much larger than the futures market. In fact, the Forex market is the largest financial market in the world with daily transactions of more than $1 trillion. This high volume means that there is always a buyer or seller for a particular Forex trade.

In the futures market, investors may not have a ready buyer or seller for their futures contract. This can result in slippage - the difference between the quoted price and the transaction price. If slippage happens in a Forex trade it is relatively small because of the almost instantaneous order execution on each Forex trade.

Most future exchanges are only open for seven hours a day, five days a week. The Forex market is a worldwide market covering all time zones, so it is open 24 hours a day, five days a week. This allows investors to execute a Forex trade as soon as a trading opportunity arises, rather than waiting for the market to open.

Futures trading can be risky because there is the possibility of slippage and market gap. The Forex is also risky because each Forex trade involves a high level of leverage, but there are safeguards built into Forex trading which can minimize loss. These include the use of software to automatically exit a Forex trade if the currency price rises or falls past a certain level.