If you trade the Forex market or futures exchange?

If you trade the Forex market or futures exchange?

Back in the nineteenth century, farmers began selling contracts to deliver their products at a fixed price at some future date certain, in an attempt to stabilize supply and demand of agricultural products of the season. At this point the futures market was effectively born.

Today, the futures market extends far beyond agricultural products and includes many different elements of manufactured goods currencies and government bonds, but the main remains the same. One crucial difference however lies in the fact that many futures traders had no intention of actually buying the goods or to take delivery and that is the future agreement itself that is trading instrument.

As an example of how futures trading works suppose that the baker enters into a contract with farmers to supply 100 tonnes of wheat at $ 50 per ton of a certain date. This agreement does not necessarily require a baker to buy wheat specified in the contract, but gives the opportunity to do so if desired. Now, Futures accounts are settled at the end of each trading day and so, if after entering into the contract, the market price of wheat on a given day is $ 40 per ton to the farmer trading account will be credited with $ 1,000 ($ 50 - $ 40 x 100) and Baker account will be credited the same amount.

The final decision on the account and delivery of wheat will be held on the agreed date and for the sake of argument, we will assume that the price of wheat is still $ 40 a ton at this point. The farmer will now have $ 1,000 in the trade account and Baker will have to pay a bill for $ 1,000 which is down. So how did the two sides?

Baker lost the $ 1,000 contract for his future, but is unable to buy wheat on the open market now only $ 40 a ton, and he expects $ 50 and so his loss is balanced agreed with his ability to buy cheaply on the open market. In fact, he is protected from having to pay more than $ 50 a ton, but essentially lost, because the market price declined.

The farmer on the other side has made a $ 1,000 contract for his future, but because the market has fallen, he can now only sell their wheat for $ 40 a ton. Once again the difference between these two is balanced, and entering into the contract has effectively won the $ 1,000 he would otherwise be lost on the open market.

In many cases, speculators enter the market and buy and sell futures. For example, if they expect prices to rise will purchase the contract from the buyer (known as buying time) and if they expect prices to fall, they will purchase the contract from the seller (known as buying short).

The Forex or foreign exchange market is similar in many ways the futures market, but has several important advantages.

The Forex is the largest financial market in the world is a giant when set alongside the futures market. This makes the foreign exchange market much more "liquid" and provided more opportunities for trade buyers and seller.

The Forex market is open 24 hours a day, 5 days a week, while most futures exchanges are open for only 7 hours a day, Monday through Friday.

Forex transactions are commission free, while brokers will charge fees and brokerage commissions and futures.

Forex transactions are executed almost immediately because of the high volume of trading and there is usually little difference between the quoted price and, in fact, paid on the transaction. In the future trading prices listed will often reflect the last trade price of similar and there may be a marked difference between the stated price and the price actually paid.

Finally, the Forex market has many safeguards built which means that Forex trading carries a lower risk of trading futures exchange.