If you are like most investors, you spend the majority of your time trading stocks on exchanges such as NASDAQ and the NYSE. You may also trade options and commodities through Chicago, but that's probably about it. However, if you're looking for a different trading experience that has higher potential rewards – and risks – you may want to look into a few other alternatives. Here, we're going to look at two of these.
Forex trading, unlike stocks, is where you trade on a single exchange that is distributed around the world. It is actually the world’s largest financial market, with over $4 trillion of currency being traded each day. Because it is distributed, trading goes on 24 hours a day during the week, starting in Sydney on Monday morning and closing in Chicago on Friday afternoon. Many different financial centers are involved in Forex trading, including Tokyo, Hong Kong, Singapore, Frankfurt, London, New York, Chicago, and Wellington in New Zealand.
Unlike the stock market, there are no centralized exchange buildings with Forex trading. All of the transactions are carried out electronically or over the phone, and money is moved around using interbank transfers. Trading is typically carried out by central banks, commercial and investment banks, pension funds and insurance companies, although some large corporations may also participate. As with trading stocks, individual investors need to open an account with a broker. There are many of these, some of which are more reputable than others. Some of the leading ones in the US include Alpari and Oanda. Both are headquartered in the USA, but have offices around the world.
The thing to understand about Forex trading is that it is highly leveraged. Normally, when you sign up with a broker, you choose the level of leverage that you want. This ranges from 1:10 to 1:500, although smaller accounts may be limited to lower leverage levels. For example, if you are trading with a leverage of 1:100 and buy a $10,000 USD/EUR contract, then you only have to have a balance of $100 to do this – the broker comes up with the rest of the money.
Because of this, Forex trading is significantly more risky than investing in the stock market. On the other hand, you have the opportunity to make major profits in a very short period of time.
Brokers make money by having a spread on the contract when they sell it. Essentially, this is the difference between the buying and selling price. For example, you might buy at a certain price, but the sales price might be slightly lower. Therefore, to break even the price of the instrument has to rise slightly – you have to make the spread. Conceptually, this isn't too different from bid and ask prices for stocks.
Although Forex trading is risky, and you can lose your entire investment if you invest too much in any one vehicle, it is regulated by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act. This means that brokers are required to maintain minimum capital requirements, have a business continuity and disaster recovery plan, and submit to annual on-site audits. There are also dispute resolution mechanisms in place – so that you can turn to an independent body if there is a problem.
Some things to look for in a broker is whether they offer an online trading platform based on Metatrader 4, how quickly they let you withdraw your money, and whether they offer trading bonuses – which are essentially additional capital that you get every time you make a trade, although there are restrictions on when you can withdraw this. Many Forex brokers also offer demo accounts, where you can trade in a live market environment without actually spending any money. Of course, since you don't put any money in, you aren't making real trades, and so you don't make any profits either.
Binary options are a newer form of investment, at least on exchanges, although they have been available as OTC investments for a long time. Over the last few years a number of binary options exchanges have opened, making them available to the general public for the first time. Like many Forex brokers, these sites also offer bonuses, although you can often get significantly better bonuses by signing up through third-party sites such as www.bonusbinaryoptions.net who have negotiated better bonus rates with the binary option brokers.
Binary options, although they share some characteristics with regular options, are significantly different in many ways. With an option, you purchase the right to buy or sell the underlying financial instrument at a certain price at a fixed time in the future. The value of the option is the difference between the current price and the fixed future price, plus a premium that is related to the amount of time remaining until the option expires. In other words, if the price difference is $10, and the option expires in six months, it might be worth $13. However, if the option only has one month to run, then the option value might be $10.50 for the same $10 price difference. The point is that you don't have to wait until the option expires to take your profits – you can sell the option again at any time.
With a binary option, once you have bought it, you can't sell it again, nor would you want to as there is no time premium. Instead, you are buying an option that is based upon whether something is above or below a specific price at the time the option expires. For example, you might buy a binary option that says the price of coffee will be above $1.21 per pound on the commodity markets in a week's time. You might purchase this option for $30, with a guaranteed fixed payout of $100 if the price is indeed at or above $1.21 when the option expires. However, if the price is below $1.21, you lose the entire $30 amount. In other words, it's an all or nothing investment which is why these are called binary options.