When it comes to the financial markets, there are a whole host of different ways of getting involved. Trading foreign currencies on the foreign exchange (forex) market is one of the most popular with part-time traders who have other jobs – and even then there are many forex trading methods for speculating on currency prices.
If you’re looking to get into forex trading, there are many different ways to go about it. Of course, not every product is suitable for everyone, so you’ll have to do a little further research to find out which is best.
Spot trades take place immediately, at the current quoted price. This is where people look to buy currency they think is going to increase in value, or sell currency they think is going to decrease in value. This is probably the most simple of all of the different forex trading products, because it is very transparent. Most traders will start here.
Futures differ from spot trades because the transaction itself takes place at a later specified time and date. The actual product is an agreement to buy or sell an asset, in this case currency, at an agreed price. These contracts are standardized and regulated, meaning transparency and clear pricing.
Options are similar to futures in that they are a contract which refers to a future transaction. The primary difference however, is that options give the buyer the option to purchase the currency at the agreed price. There is no obligation to do so, unlike with futures. Sellers must fulfill the prior agreement however. Some options are not available for the full forex operating hours; futures doesn’t have this disadvantage.
When it comes to forex trading methods, ETFs (Exchange Traded Funds) are one of the newest trading products, and strictly speaking, they don’t necessarily comprise entirely of currencies; ETFs are in fact a fund of varying assets which are popular among traders looking to diversify their portfolio. They trade like stocks, and are the product of financial companies and institutions. The downside to this style of trading is that they are not available for the same time period as the forex market, and there can be different fees and charges. If you aren’t familiar with all of the assets in an ETF, then you should look elsewhere.
Although it is not legal in the US because it is classed as gambling, spread betting remains very popular in other countries, including the UK, because it’s tax-free. Spread betting involves wagering money on the market movements. You win and lose money depending on how far the price moves towards or against you.
CFD stands for contract for difference, and they are also illegal in the US, and are an agreement between two parties to exchange the difference in price between the price of an asset at the time of making the agreement, and the value of it at the contract end. If the difference is positive, the seller pays the buyer, and vice versa. They are a popular product in countries where they are legal.
Photo Credit: Richard Alvin