traders came up with a number of different ways to invest or
speculate in currencies. Among these, the most popular ones are forex spot,
futures, options, and exchange-traded funds (or ETFs).
Spot Market
In the
spot market, currencies are traded immediately or "on the spot,"
using the current market price. What's awesome about this market is its
simplicity, liquidity, tight spreads, and round-the-clock operations. It's very
easy to participate in this market since accounts can be opened with as little
as a $25! (Not that we suggest you do) - you'll learn why in our Capitalization lesson! Aside from that, most brokers
usually provide charts, news, and research for free.
Futures
Futures
are contracts to buy or sell a certain asset at a specified price on a future
date (That's why they're called futures!). Forex futures were created by the Chicago Mercantile Exchange (CME) way back in 1972, when bell
bottoms and platform boots were still in style. Since futures contracts are
standardized and traded through a centralized exchange, the market is very
transparent and well-regulated. This means that price and transaction
information are readily available.
Options
An "option" is a financial instrument that gives the
buyer the right or the option, but not the obligation, to buy or sell an asset
at a specified price on the option's expiration date. If a trader
"sold" an option, then he or she would be obliged to buy or sell an
asset at a specific price at the expiration date.
Just
like futures, options are also traded on an exchange, such as the Chicago Board Options Exchange,
the International Securities
Exchange, or the Philadelphia Stock Exchange. However, the disadvantage in
trading forex options is that market hours are limited for certain options and
the liquidity is not nearly as great as the futures or spot market.
Exchange-traded Funds
Exchange-traded funds or ETFs are the youngest members of the
forex world.
An ETF could contain a set of stocks combined with some currencies,
allowing the trader to diversify with different assets. These are created by
financial institutions and can be traded like stocks through an exchange. Like
forex options, the limitation in trading ETFs is that the market isn't open 24
hours. Also, since ETFs contain stocks, these are subject to trading
commissions and other transaction costs.
