FOREX Benefits Over Futures
>From Agricultural Products To Financial Instruments
The origins of the modern futures market lies in the agriculture
markets of the 19th century. Farmers started selling contracts
to deliver agricultural products at a later date. This was done
to anticipate market needs and stabilize supply and demand
during off seasons.
The current futures market has moved far beyond agricultural
products. It is a worldwide market for all sorts of commodities,
including manufactured goods, agricultural products, and
financial instruments such as currencies and treasury bonds.
When the futures market is played by speculators, the actual
goods are not important because there is no expectation of
delivery. Rather, it is the contract itself that is traded, the
value of which changes constantly throughout the day as
expectations change regarding the value of the commodity itself.
Win Or Lose
In every futures contract there is a buyer and a seller. The
seller takes the short position and the buyer takes the long
position. The futures contract specifies a buying price, a
quantity and a delivery date. Speculators hope to profit by the
daily fluctuations in the futures market by buying long (from
the buyer) if they expect prices to rise, or by buying short
(from the seller) if they expect prices to fall. Futures
accounts are settled every day.
At the end of the contract period, the contract itself is
settled. The final contract buyer can now take delivery of his
truckload of whatevers. Of course, he may opt to just start the
process all over again by writing up a contract to deliver his
whatevers on a certain date at a certain price.
FOREX Benefits
The foreign exchange market (FOREX) has several advantages over
the futures market.
More Liquid. FOREX is an extremely liquid market. As the largest
financial market in the world it dwarfs the futures market in
daily exchanges. This means that FOREX stop orders can be
executed more easily and with less slippage. The FOREX is open
24 hours a day, 5 days a week. Most futures exchanges are open 7
hours a day. This makes FOREX more liquid and allows FOREX
traders to take advantage of trading opportunities as they arise
rather than waiting for the market to open.
Commission-Free. FOREX transactions have no commissions. Brokers
earn money by setting a spread -- the difference between what a
currency can be bought at and what it can be sold at. In
contrast, traders must pay a commission or brokerage fee for
each futures transaction they enter into.
Instant Transactions. Because of the high volume of trading,
FOREX transactions are executed almost instantly. This minimizes
slippage and increases price certainty. Brokers in the futures
market often quote prices reflecting the last trade -- not
necessarily the price of your transaction.
Safeguards. Final prices in futures are always a little
uncertain because of market gap and slippage. The FOREX is less
risky because of built-in safeguards in the trading system.