Forex and commodity trading are two of the most popular choices regarding investment opportunities. However, these two types of trading are quite different from each other in several ways.
Forex trading involves buying and selling different currencies, while commodity trading focuses on purchasing and selling raw materials such as metals, oil, or agricultural products. You can learn more about these two topics by visiting the site here.
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The type of products traded
In forex trading, the main product that is traded is currency pairs. For example, you might purchase Euros with US dollars. In contrast, commodities you can trade in commodity markets include metals, energy products, and agricultural goods.
The way prices are determined
The prices of currency pairs in forex markets are mainly determined by economic factors such as inflation, interest rates, and trade balances. On the other hand, commodity prices are influenced by various factors, including weather conditions, political stability, and supply and demand.
The size of the market
The forex market is the most significant worldwide, with a daily turnover of over SGD5 trillion. The commodity market is much smaller, with a daily turnover of around SGD30 billion.
The role of central banks
Central banks play an enormous role in forex markets, as they can influence currency prices through their monetary policy decisions. For example, if a central bank raises interest rates, this will usually strengthen its currency. On the other hand, central banks have little impact on commodity prices.
Forex trading is typically done on margin, meaning you only need to put down a small portion of the total value of your trade. For example, if you’re trading with 50:1 leverage, for every SGD1 you have in your account, you can trade up to SGD50. In commodity trading, margin requirements are usually much higher, as commodities are considered riskier than currencies.
Another difference between forex and commodity trading is the trading hours. You can access the forex market day and night from Sunday evening to Friday night, while commodity markets typically have set trading hours.
The regulatory environment for forex and commodity trading also differs quite significantly. The FX market has no central exchange or regulator. Instead, currency trading occurs through a network of banks, brokers, and dealers. In contrast, commodity markets are typically regulated by government agencies such as the Commodity Futures Trading Commission (CFTC) in the United States.
Another critical difference between forex and commodity trading is how taxes are applied. In general, profits from forex trading are taxed as capital gains. In contrast, commodity trading profits may be taxed as either capital gains or ordinary income, depending on your country.
Another difference between forex and commodity trading is the minimum deposit required to start. You can often start trading with just a few hundred dollars in forex trading. However, the minimum deposit in commodity trading is usually much higher, as commodities are generally considered riskier than currencies.
Regarding trading platforms, there is a wide range of options available for forex and commodity traders. However, some platforms may only offer one or the other. For example, MetaTrader 4 is a popular platform for forex trading, but it does not support commodity trading.
Leverage is another crucial difference between forex and commodity trading. Leverage is a loan your broker provides to allow you to trade with more money than you have in your account. It can intensify both your profits and your losses. In forex trading, leverage is typically much higher than in commodity trading.
Traders commonly use stop-loss orders to limit their losses. In forex markets, stop-loss orders are typically executed at the market price when triggered. However, in commodity markets, stop-loss orders may be subject to slippage, meaning that you may not get out of your position at the exact price you wanted.
The pricing of forex and commodity contracts can also differ quite significantly. Currencies are traded in pairs, each being quoted against another. For example, if the EUR/USD is trading at 1.10, one euro is worth 1.10 US dollars. On the other hand, commodities are generally quoted in US dollars per unit. If crude oil is trading at SGD60 per barrel, one barrel of crude oil costs SGD60.
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