Foreign Exchange is often called forex. It is a market where currencies from different countries are bought and sold against each other. Forex trading is buying and selling currencies with the idea that their value will increase or decrease against each other, so you can buy a currency for $1 and sell it later for $1.10.
Futures trading differs from forex in that investors don’t buy and sell currencies. Instead, they trade commodities and futures contracts on those commodities. A commodity is a physical item such as wheat or gold which can be purchased and traded. Futures contracts represent the obligation to buy or sell that commodity at a predetermined price later, usually when the contract expires.
What is traded
In forex trading, you deal with currencies from different countries. However, in futures trading, you trade commodities and futures contracts on those commodities.
Intended purpose
In forex trading, you try to make gains by speculating on the fluctuations of currency values. In futures trading, you trade the commodity itself and hope to realize a gain on that before expiration day when you need to deliver or receive the item.
Margin
There is no actual trade of money between traders in forex trading when they buy or sell currencies. They agree upon the rate at which one currency is traded for another. In futures trading, however, buyers and sellers must enter into formal agreements that require them to deposit margins or percentages of their trade to reduce counterparty risk between each other.
Taxation
In Australia, forex traders do not have to pay taxes on gains or losses in value unless they trade with a registered professional trader with the Australian Taxation Office. Individuals can buy and sell currencies without paying any tax. However, futures trading requires filing taxes every year regardless of trading activity.
Minimum account size required
The minimum account size required to start trading forex varies from broker to broker, and there isn’t one set standard for this amount. In general, though, you need at least $250 to get started (not including leverage or margins). Futures trading requires that you deposit $500,000 to start.
Deposit required for opening an account
The minimum deposit needed to open a forex account varies from broker to broker. Most require around $250-$10,000, but some brokers have special offers where they will give you up to $1,000 free when you open an account with them. The minimum amount required for futures trading is about $25,000 – which is much higher than other types of investments.
Why trade with forex?
Risk
In forex, your potential losses are limited to the amount of money you have in your account. However, you can lose much more than that in futures trading because the exchange sets the margin requirement, and it’s not always equal to what you invested. For example, if your margin is 10% on trade and the price drops 20%, you will only be able to lose 10%. But this means that with a low enough drop, you could theoretically lose everything in your account.
Market volatility
Forex market prices tend to move very quickly due to large volumes of traders moving their money around at any given time. There’s also less regulation which makes it easier for these movements to happen without being detected. In futures trading, however, you can find out about events that affect the market (like natural disasters or political decisions) before they happen and thus make better trades based on this knowledge.
Why trade with futures?
Regular payouts
Futures trading allows you to take delivery of the commodity when your contract nears expiration and sell it to make a profit right away. For example, suppose you own oil futures and need cash in three months but still want to participate in any price increases. In that case, you can take delivery when the contract expires and sell the commodity when prices are higher than they were during your original agreement.
The fastest way to get started
Futures trading is the easiest and quickest way to start making money because you only need $25,000 to open an account and start trading. In forex, however, you need a lot more money (usually at least $250), but some brokers will give you cash for opening an account with them.
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