Stocks, Futures & Forex :

The Difference Between Stocks, Futures and Forex

Today, it will not be easy to ignore the amount of financial instruments made available to individuals. Besides, it is not uncommon that diversity rhymes with complexity.

From this point of view, we see more and more products emerging, the functioning of which could escape a large part of the neophytes. We therefore want to clarify for our readers the differences between some of the best-known instruments that are stocks, futures contracts and Forex.

The actions

How do you trade the shares?
These are titles of property issued by corporations giving rise to different rights, such as receiving a dividend or attending general meetings. Actions were born in the 19th century with the rise of capitalism.

Currently the principle is the same as at the time, it consists of recovering an added value on the rise of a purchased security. However, since the emergence of stocks, speculative methods have evolved somewhat. Indeed, even if one can still buy shares for cash, there is the SRD (Deferred Settlement Service) allowing investors to play down certain values ​​or to benefit from a leverage of up to 5.

It is not necessarily obvious to trade stocks, it is a product that can prove to be quite restrictive. Indeed as we said before, the maximum leverage is 5, this remains rather negligible compared to those proposed on the forex. In addition, the transaction costs are fixed but are quite large (2 € for the lowest) and can be added guard fees according to brokers.

In the equity market, and especially in leveraged positions, it is clear that a greater amount of money is entered on the market than the one on the account. Therefore, a debit balance account is not unlikely. This possibility is increased by the fact that large gaps can be observed from one session to the next.

In terms of account size, brokers usually require a minimum balance of between 500 and 1000 €.

The Futures

What is a Future contract?
Even if future contracts appear to be more complex products than equities, they are no less old. Indeed their creation dates also from the 19th century, used by farmers of the old time to guard against fluctuations in prices, they are now part of the most treated financial products.

In order to better illustrate the functioning of this instrument, it seems to me that an example will be highly desirable. Let us return to a century before our era. I am a rich peasant and we are approaching the summer of 1910, when we will reap our wheat. After the harvest I want to sell it at a good price and profit from a good turnover, however the sales of the wheat are organized only from October. The price of wheat seems to me rather high, I think it will drop by October, yet I would like to sell it at the current price. A solution is offered to me, I can sign a futures contract (= future contract) with another party. This contract stipulates that I will deliver my wheat on a scheduled date (October) at a fixed price (I wish to sell it at the current price). So if prices go down, I will have no fear.

Of course the explanation may seem simplistic but it illustrates well the functioning of a future contract. Of course currently this type of financial products is mainly used to carry out only speculation and this is what is discussed in this course.

They are highly liquid financial assets, but in contrast to equities they offer variable but relatively significant leverage (which can be close to 1: 100 for currency contracts).

However, to treat futures a fairly large margin is required. According to the broker, we will ask € 2000 to 7000 € present on the account to guarantee the purchase of a future contract. Compared to transaction costs, they are generally higher than those charged on shares, in the range of € 4 to € 12. However, for the purchase of a single future cac40 (FCE) contract, a one point change on the underlying will correspond to a debit or credit of € 10 on your account. In this way, even high, transaction costs are very quickly covered. The high liquidity of the market will offer you spreads rather low contrary to those visible on the shares.

Forex

What are the specific criteria for the Forex market?
This exchange market which is strongly discussed on this site is a so-called OTC market, ie unlike futures and equities, it is not centralized in exchanges. Transactions are thus freely made from the buyer to the seller via intermediaries called brokers (= brokers) which allow each one to freely trade the exchange rates.

This market, which has been booming in recent years, is seeing close to $ 4 trillion daily on its order books. Continuously oriented towards individuals, it is very interesting for them thanks to the many advantages that it offers (small account, strong leverage, ...).

It is a much more accessible market, and for good reason everything may seem advantageous. Indeed, according to the brokers you can observe leverage of up to 1: 500, ie you can invest 500 times the balance of your account in one position. Moreover, the enormous and growing liquidity of this market offers investors excessively low spreads. They will also add non-existent transaction costs, in fact the brokers are paid on the spread and not on a fixed cost. Generally, forex trading platforms are equipped with systems to automatically cut positions when a threshold of losses is reached too large, this avoids having a debit balance. Compared to the minimum size of an account, this remains very variable. Indeed for accounts in micro-lots (1000 currency units) one can start trading with 10 €, whereas on accounts in mini-lots (10 000 currency units) it is customary to place a minimum balance of 500 €,

Conclusion

As we have seen, there are large disparities between each of these markets. Each product targets a particular investor profile. Indeed the trading action is rather to be practiced by people not trying to carry out dozens of operations per day, but rather for those who will wish to do the swing trading on several days / weeks. On the contrary, futures, often reserved for professionals, are oriented towards savvy traders who master all aspects of trading and financial markets. Forex may be suitable for a wide variety of profiles, even if it is oriented more and more towards the more neophytes (accounts below 100 €), it may also interest large investors to practice strategies of large scale Such as carry trade for example. In conclusion we will remember that everyone can find the product that best fits his trading plan.
0