Differences Between Forex & Options
Anyone can get involved with investing relatively easily; it doesn’t take as much knowledge as people often think and it's possible to make returns with just a little amount of time and effort. You don’t even need a huge amount of starting capital. However, it could be considered a good idea to work with a small amount of money when you first start out.
What often causes people to stray away from the idea of investing is the range of different investment vehicles that can be bought and sold on the stock markets and other exchanges. Most people understand the basic concept of buying and selling stocks and shares, but when you start considering forex trading, options trading, and futures trading things do tend to get a little more complicated.
It's a really good idea to understand how the various financial instruments and forms of trading differ from each other. Understanding this will help you enormously when it comes to the kind of investment strategies you will want to use and how you can achieve your goals. On this page we look at the differences between trading forex and options, and why we believe trading options is better.
In many respects, comparing forex and options trading is like comparing apples and oranges; they are actually completely different things. However, they are both a form of investing and if you are not completely clear on how the two things differ then it can certainly be helpful to learn more about them to avoid any potential misunderstandings.
You may decide that forex is a better fit for your investment goals than options, or vice versa, but without knowing exactly how they differ then it is very difficult to make an informed judgment.
The word forex is a compound word based on the term foreign exchange, which relates to how the value of different currencies around the world relate to each other. The value of any particular currency in relation to another currency fluctuates all the time: sometimes with very small movements and sometimes dramatically.
It's possible to see those fluctuations through forex trading, where essentially you have to try and predict how one currency will move relative to another. This might sound impossible, but there are a number of factors involved and it's possible to correctly predict forex movements through intensive research and analysis. Forex trading basically involves buying and selling different currencies to take advantage of their price movement.
Options trading involves the buying and selling of options contracts, which are very different to foreign currencies. They are still trading instruments, in that the idea is to buy and sell at the right time in order to make a profit, but they are much more complex than foreign currencies. A very simple definition is that they are financial contracts that give the holder the right to buy a specified security at a fixed price, at or before a fixed expiration date. They can give the holder the right sell a specified security at a fixed price.
There are certainly good reasons for trading foreign currencies, and there are many people who make very good money from doing so. However, when directly comparing forex to options, you will find that there are a number of advantages to trading options. We take a look at these advantages below.
Advantages of Options Over Forex
One of the biggest advantages options has over forex is the flexibility of what you can invest in. This can lead to greater opportunities for profit. Forex trading is limited strictly to foreign currencies, but you can buy and sell options contracts based on a range of underlying securities including stocks, commodities, indices, and futures. In fact, you can trade contracts that are based on foreign currencies too, so you can still speculate on the forex market.
If you want to be successful at trading forex, then you really need to engage in a very detailed analysis to try and predict how the value of foreign currencies will move. There are many factors that can effect price movements on the forex markets and ideally you need to understand them all and the impact they can have. While research and analysis plays a big part in options trading too, you don’t necessarily have to go into as much detail if you prefer to keep things simple.
In theory, you can keep things as simple as you want when it comes to options trading – if you just want to speculate on certain stocks going up in value then you can just buy the appropriate contracts and exercise your option to buy the stock if it does increase in price. Otherwise if you want to get more in-depth then you can learn all about creating options spreads that can be used in a variety of strategies.
Options trading also offers a certain degree of risk control which helps if you are not comfortable with taking big risks. There are plenty of strategies you can use to limit risk exposure; options can be a great tool for hedging as well.