Because forex is so awesome, traders came up with a number of different ways to invest or speculate in currencies.
Among these, the most popular ones are spot forex, currency futures, currency options, and currency exchange-traded funds (or ETFs).
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!).
FX 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 on a centralized exchange, the market is very transparent and well-regulated. This means that price and transaction information are readily available.
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 Mercantile Exchange (CME), the International Securities Exchange (ISE), or the Philadelphia Stock Exchange (PHLX).
However, the disadvantage in trading FX 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 or ETFs are the youngest members of the forex world.
A currency ETF offers exposure to a single currency or basket of currencies. Here’s a list of the most popularly traded currency ETFs.
ETFs are created and managed by financial institutions who buy and hold currencies in a fund. They then offer shares of the fund to the public on an exchange allowing you to buy and trade these shares just like stocks.
Like currency options, the limitation in trading currency ETFs is that the market isn’t open 24 hours. Also, ETFs are subject to trading commissions and other transaction costs.
Spot Forex 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 $50! (Not that we suggest you do) – you’ll learn why in our Capitalization lesson!
Aside from that, most forex brokers usually provide charts, news, and research for free.
In the School of Pipsology, when it comes to the specific way to trade currencies, we’ll be primarily talking about the spot forex market.