Different Ways to Trade Forex
There are many different foreign exchange trading products. The most active and simplest is a spot FX contract. A spot FX transaction entails buying one currency and simultaneously another for settlement in a period of two days for most currencies. Spot FX is traded "over the counter" (OTC) meaning bilaterally between counterparties, one of which is often a bank. In addition to spot, forwards, non-deliverable forwards, swaps and options, comprising approximately 97 per cent of all FX volume, are traded OTC. Individual investors can trade spot FX through accounts with specialized FX brokers or banks subject to local regulation. Institutions can trade with banks or on electronic trading platforms directly or via so-called prime brokers.
FX futures and options are traded on exchanges. Exchanges provide market transparency and equal market access for all participants Futures are traded to fixed expiration dates and are equivalent to spot FX or forwards contracts in terms of gaining market exposure. Options on futures are also listed on futures exchanges. All futures market participants trade through accounts held at futures brokers. These brokers are known as futures commission merchants or FCMs in the United States.
Options products are available OTC as well as listed on exchanges. Like options in other asset classes, options confer the right but not the obligation to buy, in the case of a call, or sell, in the case of a put, a currency pair at a fixed strike price.
In the United States, options on spot FX are listed on stock exchanges, including Nasdaq. Institutional and individual investors trade exchange-listed spot FX options through stock brokerage accounts.
ETFs stand for "Exchange-Traded Funds", which tracks a particular asset, and trades like a common stock on a stock exchange. For example the S&P 500 ETF allows you to invest in the S&P 500 index with the purchase of a single financial security traded on an exchange. There are ETFs that allow you to indirectly and directly invest in the FX market. For example, ETFs that track a broad set of securities from a specific country or region are listed in versions that expose the investor to the inherent foreign exchange risk in the ETF basket or index or in variants in which the FX risk is fully hedged.