In the following article I share what I learned about Forex Vs Equity And Forex vs Futures. The FOREX can best be described as global 24 hours market where the sale and purchase of currency takes place. Although, there are always immense profits that can be made from here, the same can also be said about the losses.
Moreover, the FOREX market offers traders high leverage on a small deposit. Deals of purchases and sale can vary between traders. Although there are many transactions that take place on a daily basis, futures are found to be a much more preferred method of sealing a deal.
FOREX vs FUTURES
A futures is a contract between two parties, where a deal to sell or buy currency is fixed at a later date in the future. The date need not be in the near future and can run into weeks, months or years.
Such a date is called the ‘delivery date’ or ‘final settlement date’. Secondly, the price is also fixed earlier and is called the ‘settlement price’. The time when the final prices of the futures are determined is called the ‘expiry’. Even options as we have seen above, can be traded in futures contract.
Honoring a futures contract is important as in this case, both parties are obligated to honor the commitment. Futures traders are usually hedgers ( people who are interested in the underlying asset, and who invest in it, in the hope of canceling the risk of another investment) and speculators (people who try profit making by predicting certain fluctuations in the market). There are a few specifics which are looked into before the sealing of a futures contract-
- The value of the underlying asset is important and the assets themselves could vary from being bonds, or even a short term interest rate.
- The settlement has to be either a physical or a cash settlement.
- The amount, value and number of underlying assets is also noted for example the value of 16 bonds.
- The currency in which the contract is noted.
- The month and date of delivery of the settlement.
- The grade of the deliverable is also important and it varies in both kinds of settlements.
When comparing futures and regular cash trading in the FOREX market, some differences can be found. Trading of futures contracts happens actively only 4 times a year- the date being the third Wednesday of March, June, September and December whereas trading in cash happens on a daily basis. Also, the adjustment of maturity dates in cash FOREX happen everyday.
On the other hand of course, futures contracts also allow traders to buy and sell contracts which means cash settlement is not a must unlike for regular cash trading. Also, while 24 hours trading can happen in FOREX, it is limited in futures. Commission free trading happens in the FOREX market but does not in the futures market. Lastly, the risk is lesser in FOREX in comparison with the futures market.
FOREX vs EQUITY
Equity is best described as the difference in the actual value of a product and its speculation; or ownership in a particular property. Equity investment however, means purchase of shares of a particular stock, anticipating profits as prices rise. When trying to understand the growth of an equity market there are certain considerations which are taken into account-
- Size– The best way to find out the size of a market is through market capitalization, where the values of all the stocks listed are taken into account. Since markets all over the world are huge, GDP is the measure by which market capitalization is adjusted; thus measuring the size of a market better. Such a figure provides only a partial view and other indicators such as trading activities are generally taken.
- Efficiency– Market concentration and percentage of zero return weeks are two important factors taken into account. In addition, the performance of individual firms should reflect in the prices. If this is not the case, speculation will be a deciding factor in determining the price of a share.
- Stability– Here, skewness or a fluctuated growth and volatile market returns go hand in hand in determining the stability of a market. Markets with more skewed negative distribution of stock are also likely to give negative returns to a larger effect. It is noted that volatility tends to be higher during market booms than declines. The upward movement of prices is not always a continuous movement and can be staggered in nature.
The first difference between FOREX and equity would be that the FOREX market is a 24 hours market while the stock market is not. Also, the commissions made on trading in the FOREX tend to be much lower than in the latter.
Furthermore, because of the availability of breaking news at all times, deals take place at a much faster pace in the FOREX market. Traders always have access to trading in a rising or falling market, and there are no restrictions on short selling. It is interesting to note that today, traders look closely at the equity market to analyse the rise and fall of various share prices on stocks.
Very simply put, if the equity market shows a rise, it means that there are investments taking place. On the contrary, if there is a fall in the equity markets, it shows that investors are choosing to sell their local shares with the aim of buying more overseas shares. Overall, one can say that investing in global equity markets has become much easier, with telecommunications making the world a smaller place.