The foreign exchange (forex) market and the commodities market are both extremely popular areas of trade amorng investors, as they offer great opportunities to make returns on your investment. Of course, because both are directly impacted by external factors, the markets can prove to be extremely volatile, which provides the opportunity to both make profits and losses.
The most obvious difference between the forex and commodities market is that they involve different securities. Forex is the trade of global currencies, like pounds, dollars and euros for example, whereas commodities trading is the buying and selling of goods that occur naturally in the ground, can be harvested or can be mined, like coffee, oil or gold.
There are some similarities between forex and commodities trading, including the fact that both can be traded on the futures market. Additionally, for both forex and commodities you can use a contract for difference (CFD) which is an agreement between an investor and a broker that enables you to profit from price fluctuations in the market without owning the underlying asset.
This is made possible because the profit or loss is calculated from the difference between the value of the asset from the beginning and end of the contract. This means that you could learn how to trade oil CFDs and open a trade in the commodities market without owning the commodity itself.
However, enough about similarities, as we’re here to focus on the differences, so to find out more, keep reading.
One of the main differences between forex and commodities trading is the regulations that apply to the markets. Forex markets are regulated, but these regulations are fairly loose. On the other hand, commodities are highly regulated, so it’s important that you thoroughly research the restrictions and rules that may apply to your trades to avoid being caught out.
The way in which you trade forex and commodities differs significantly, since forex is an over-the-counter (OTC) trade and is therefore traded through brokers. Commodities are traded on an exchange, meaning investors gain exposure in this market by acquiring shares. Trading on an exchange also means that daily range limits apply and when these are exceeded, no more trades can be made.
Since forex is traded through brokers, leverage can easily be acquired. This is the means of borrowing a certain amount of capital from a broker in order to acquire an investment. When trading forex you therefore have the ability to open a fairly large position without having to part with much of your own capital, since you will only have to deposit enough money to cover the margin.
You can also access leverage in the commodities market, however the exposure that you are able to acquire with said leverage will not be as large as that you could obtain on the forex market. This is because commodities are affected by exchange limits, which do not apply to forex, since it is an OTC trade.
Forex or commodities — which should you choose?
Of course, there are pros and cons that apply to both an investment in forex and in commodities, therefore the underlying factor that will influence your decision is personal preference. Some things that are worth taking into consideration when weighing up which market is right for you are:
- You can open a larger position in the forex market since there are no exchange limits on the OTC market. However, greater exposure means greater risk of losses.
- The regulations that apply in the commodities market are far stricter than those that apply to forex.
- Commodities have a daily range limit, meaning you can’t exit your trade once that limit has been reached, which could leave you vulnerable and see you make substantial losses.