Comparing Futures and FOREX Trading

How did the whole futures market begin? It all started with agricultural produce in the last century. Farmers began to contract with buyers to sell their produce at a future date and there was a kind of stabilization of demand and supply through the year. This is why it was called 'futures'. Today, however, the term encompasses a lot more than that. Today, futures refer to all kinds of commodities. This could range from agricultural goods to manufactured products to bonds and currencies. All a futures contract does is to say what will be paid for a product at a particular future date. What is even more complex is that a futures contract can be traded too! Once speculation began using futures contracts, it went beyond the demand and supply of actual goods. What the market is playing with is the value of the goods and what it is worth from day to day.

Here's how it works. A buying price is fixed, so is a selling price as well as a particular quantity. The buyer takes what is called the long position and the seller takes the short position. As the market prices fluctuate, so do the profits or losses that the buyer and seller make. When the contract period is over, the accounts are settled on the basis of the prevailing price on that particular day in the market. These kinds of contracts are based on speculation and the speculation is done based on market trends. How do speculators make their money? They try and buy short from the seller if they think that prices are going to fall and they buy long from the buyer if they feel that the prices will rise. However much they keep their ear to the ground, observing market trends, there is a large element of gambling to these dealings. The bottom line is that one can never be certain.

FOREX on the other hand, is probably a better deal. This stands for the foreign exchange market. This is much, much larger than the futures market. It is also more liquid and the markets are open 24/7 so it is easier for traders to take advantage of immediate good deals rather than wait for the markets to open. The earnings of brokers come from the difference in the buying and selling prices of a currency so there is no commission in FOREX transactions. The deals are immediate and go into very high volumes. This increases price certainty while it minimizes slippages. Thanks to the safeguards built into its system, FOREX transactions are less risky than futures. In futures, there is a possibility of slippage which could lead to debits.