The fundamental difference between forex and commodity trading has to do with the underlying security. Commodities trade involves goods like cocoa, coffee, and products that can be mined like oil and gold. On the other hand, forex —or foreign exchange — is a global market that trades in currencies like rupees, euros, dollars, and yen. There are certain similarities between commodities vs forex trading with respect to their approaches and analysis. However, there are a variety of factors that can help you choose which market is ideal for you.
As of today, there are around 50 well-known commodity markets globally. These markets facilitate investment trading in around 100 different primary commodities. There are many ways to invest within a commodity but the most direct way is to buy into a futures contract. This is a contract where a holder is obligated to sell or buy a certain commodity at a specified price on a future delivery date. There are three crucial players that make commodity trading.
Commercials: These are the entities that are involved in the processing, duction, or merchandising of a commodity. For example, corn farmers serve as commercials for the commodity of corn. Commercials account for the majority of commodity trading.
Large Speculators: These involve a group of investors who have pooled their money thereby reducing their risk and increasing their gain. Similar to mutual funds, these large speculators have money managers who help make their investment decisions.
Small Speculators: Small speculators are the individual commodity traders who trade via a commodity broker or through their own accounts. Both major and small speculators have the ability to heavily affect the commodities market.
Commodity Trading Benefits
The advantages of trading in commodities are that
1. Commodities make great diversifying options for a portfolio.
2. Investors get exposure to global markets.
3. Commodities have longer market hours which allow for more trading time.
4. Most commodities have seasonal patterns that can be tracked.
5. Commodities can be traded with somewhat higher leverage than some securities.
6. Commodities have a lower transaction cost than other securities.
7. Commodities can make for effective carry trades.
When it comes to forex markets, they mainly comprise commercial companies, banks, investment management firms, retail forex brokers, and hedge funds. Forex is currently the biggest financial market in the world. Currency rates on forex are a factor of the demand and supply of the country’s currency by investors on the market. This demand and supply depend upon inflation, interest rates, economic uncertainty, trade balance, political scenarios, and more within a certain country. In general, the level of confidence in a country’s economy influences the currency’s price on forex.
Currency Trading Benefits
1. Currency trading is highly liquid so you can easily access your returns in case of any financial emergency.
2. Similar to commodities, investors get exposure to global markets by trading currencies.
3. Currency markets are open all day for five days of the week which makes for flexible trading hours.
4. Currencies offer higher leverage than commodity trading.
5. Investing in currencies can be used as a diversification tool.
6. You can hedge your forex investments to protect it from any political or event-based risk.
Commodity vs Forex Trading
Trading on forex vs commodities markets is similar on certain fronts and different on others. Similar to commodity trading, you can use currency futures on forex to speculate the short term movement of the markets. Another similarity is that you have the benefit of arbitrage with both commodity and forex trading. This implies you can earn returns by taking advantage of the varying exchange rates of the same currency or commodity in different markets. However, when it comes to regulation in forex vs commodities markets, commodities are heavily regulated while forex trading is more loosely regulated.
Another difference between forex and commodity trading is that while both offer options to leverage one’s trades, there is a significantly higher amount of leverage in the currency market which is relatively easier to fulfill. Finally, forex is traded over the counter through brokers or banks while commodities trade on an exchange. Hence, commodities have daily limits which if exceeded, prohibit further trading. However, for investors seeking diversification and exposure to global markets, both make for effective investments.