The terms forex and futures are among the terms commonly used by participants in financial markets. They may be heard spoken in reference to the same or varying contexts, so traders will want to have a clear understanding of what each represents.
Anyone who has traveled or bought and sold goods abroad will have an awareness of foreign currencies and their differing values. While foreign exchange trading has existed over the centuries, U. President Richard Nixon in inadvertently gave incentive to the development of more active foreign exchange trading around the globe when he took the U. It was an action that, over time, encouraged many countries to float their currencies against the U.
Unlike in the past, when someone who wanted to buy and sell currency might have to go to a currency exchange operator or a major international bank, traders nowadays can open a currency trading account through a forex brokerage or full-service financial brokerage.
Currencies are traded in pairs, meaning that if you are buying one, you are simultaneously selling another. Retail forex is a lightly regulated, over-the-counter market, where parties trade directly with each other or through brokers. Some brokers will allow trades in sizes as small as micro lots of 1, currency units, or nano lots of currency units. Forex is considered to be an individual class of assets that can be bought and sold directly, like equities, commodities and bonds.
And as their name implies, they are contracts whose price is determined according to an estimated future value of the underlying asset. Unlike forex, futures are normally traded on organised exchanges.
Futures first evolved from trading in the commodities markets in the 19th century, when farmers sought to guarantee a future sale price for their goods. The contracts come with an expiration date.
One party in the contract agrees to buy a given amount of given asset and take delivery of it on pre-defined date, while the other party agrees to sell it on that date at the agreed-upon price. Futures contracts are typically scheduled to have expirations four or more times per year. After their initial purchase, the contracts can be further bought and sold on the secondary market.
Traditionally, when futures were bought and sold, the seller agreed to make delivery, and the buyer agreed to take delivery, of the underlying asset when the contract expired. However, except for occasional physical deliveries on some commodities-related contracts, most futures deals nowadays have cash settlements after expiration.
Forex futures operate on the same principle as other kinds of futures. In this trading, the two parties to the deal will enter a contract to trade one currency for another for a given price on a pre-established future date. Their prices are calculated by taking into account the carrying costs for the borrowing and purchase of the target currency over the life of the contract as well as the possible investment earnings of the base currency.
Some of the major exchanges where forex futures are traded include the Chicago Mercantile Exchange , the Intercontinental Exchange and the Eurex exchange.
Forex futures contract sizes vary according to the value of the currency. Forex trading may be more accessible for beginning traders, because it requires a smaller amount of initial capital and more limited exposure to long-term risk. In some cases, the two types of financial trades can be used simultaneously to an advantage, especially by more experienced traders who have become familiarised with the characteristics of each.
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The FXCM Group assumes no liability for errors, inaccuracies or omissions; does not warrant the accuracy, completeness of information, text, graphics, links or other items contained within these materials. Registered in England and Wales with Companies House company number Foreign Exchange — The Currency Market Anyone who has traveled or bought and sold goods abroad will have an awareness of foreign currencies and their differing values.
How Is It Done? Futures Forex is considered to be an individual class of assets that can be bought and sold directly, like equities, commodities and bonds. How Do Futures Work? Futures for any type of assets are bought and sold by contract. Forex Futures As with other types of underlying assets, futures can be used to trade forex.
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