To trade with and without expiration – What should you know

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Traders: Which Markets Should You Trade?

As technology increases and trading innovation continues, the world is seeing an expansion in the types of trading instruments that can be used. Even seemingly separate markets are attempting to steal each other’s market share. For example, a person no longer needs to buy gold physically or even from a futures contract, they can simply buy an exchange traded fund (ETF) to participate in the movement of gold prices. Considering that similar scenarios are possible with currencies, commodities, stocks and other investments, traders can fine tune how they trade and tailor it more to their individual circumstances.

TUTORIAL: Trading Systems

Markets, Markets, Markets
Depending on education and experience, a person may not even be totally aware of the investments or trading vehicles that are accessible with a click of the mouse. Even while avoiding abstract and illiquid markets, traders can find trades within many different markets:

Stock Market: This well known market simply involves buying/shorting shares of a company.

ETF Market: Funds representing all sorts of sectors, industries, currencies and commodities. Trading similar to stocks, these funds can be bought and sold rapidly or held long term.

Forex Market: The largest market in the world. The forex market facilitates the exchange of one currency for another currency. Currencies are always traded in pairs, with many potential combinations available, but only some of which are very liquid.

Options Market: A market which allows participants to undertake positions in the derivative of an asset. Therefore, the option is not ownership of an underlying asset (though rights and obligations exist), but the option price (along with other inputs) fluctuates with the value (or lack of) that the underlying asset is providing.

Contract for Difference (CFD): A hybrid of the stock, forex and options market that allows participants to place trades in a derivative product based on an underlying asset. Generally the CFD does not have an expiry date, premium or commission (see broker’s terms and conditions), but does require the participant generally pay a larger bid/ask spread than what would be seen in the actual physical market for a product. (To learn more about CFDs, see Instead of Stocks, Trade A CFD.)

While there are other markets, these markets are all now easily accessible from home to just about anyone with an internet connection. Each market offers different advantages and disadvantages. Because of this many traders may decide to trade only one market because they feel it suits one aspect of their life or they lack knowledge of available markets. This could mean that traders are not taking advantage of the correct market given their trading style.

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Which Markets to Trade?
The style of trading employed, financial resources, location and what time of day a person trades (or wants to trade), can all play a role in which markets will be best suited to the individual. Since some of these markets may not be familiar we will look at two common trader groups and how they could implement the use of other markets to improve their trading. It is important to be aware of such alternatives, as they may provide for some fine tuning which can result in better results over the long run.

Alternative Markets For Day Traders
Since 2000 there has been a steady increase in the amount of turnover in the foreign exchange markets. This has meant an increase in the number of day traders opening accounts with forex and CFD brokers, which have also increased in number. The main lure is that minimal investment is required. Accounts can often be opened for as little as $100-$1000 and will allow individuals to day trade global currencies, indexes and commodities. With the forex market the trader is actually exchanging one currency for another, possibly in an account denominated in yet another currency. It seems nice – low barriers to entry, generally no commission (but a spread is paid), high leverage (high risk/high reward) and free trading tools such as charts and research. But there are alternatives if one wants to trade forex or CFDs, which can encompass just about every other market. (Check out Day Trading Strategies for beginners to learn about some common strategies.)

Exchange traded funds now allow traders to partake in the currency moves by making trades on the stock exchange. While opening a day trading stock/ETF account will require more capital, there are advantages in that ETFs themselves can be leveraged or unleveraged. This means someone who wants to take on additional risk/reward for each incremental price movement can do so by buying a “3X bull” ETF for example. Also, with an ETF, a trader is not required to pay the spread. Instead, they can sit on the bid or offer providing liquidity and thus collecting ECN rebates (offsetting commissions, or providing additional profit). This is very advantageous in currency pairs with limited movement, or when the trader wishes to implement a scalping strategy.

ETFs also allow a trader to partake in other markets such as the movement of oil gold, silver or stock indexes; traders can move out of the CFD market and begin trading ETFs as well, providing them with a greater range of products. Depending on trading style, using ETFs, CFDs and the forex market may be wise. Different instruments can be used to hedge or take advantage of disconnects in price such as a currency pair moving without the corresponding ETF moving (or vice versa).

Alternative Markets For Long Term Investors
Commodities often attract long term investors, yet they may be unfamiliar with futures markets and so they have not participated directly in the movements of commodities such as gold, silver or platinum. Also, it is unlikely they have different currency exposure. And while they may have considered options trading, the time-framed nature of the instrument does not appeal to their trading plan.

Here is another opportunity where understanding different markets can open new doors even for conservative investors who make few trades. After learning about the different markets, the forex market can be used to gain currency exposure. ETFs can also be used to gain currency exposure, as well as participate in the price movements of gold, oil, silver or even other global economies. CFDs can be used by long term traders since the bid/ask spread is minimal over the time frame and they provide some of the benefits of options, but without the expiry date. For instance, large blue chip stocks are often available via CFDs. The stock is not actually owned, which allows for the participation in price movements with less capital in use (because high leverage can be used if desired), but the CFD does not provide voting rights or any of the perks associated with ownership of a piece of that company. When trading any instrument it is important to be aware of taxes and how the instruments fit into overall objectives, including retirement. Each instrument may be treated slightly different; therefore it is wise to seek out the advice of a professional.

Bottom Line
It is important to be aware that alternatives are out there. This does not mean every alternative will be good for every individual, but using a combination of markets or fine tuning how we interact with those markets can have an impact on results. For some individuals this may mean they need to switch markets as their success is unlikely if they continue to do what they are doing. On the other hand, incorporating other markets may provide benefits like small changes in costs, capital outlays and risks that can have large effects over the long run. Becoming familiar with all the markets available will allow for more opportunities and potentially increased profits or reduced costs. (For related reading, take a look at 5 Equity Derivatives And How They Work.)

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Reading time: 9 minutes

Our guide on Forex vs Stocks will enable you to decide which is the better market for you to trade on. We will compare the general differences between them in terms of trading, trading options, liquidity, trading times, the focus of each market, margins, leverage, and more!

Anyone new to trading is likely to wonder, “which is better: Forex or stocks?” Let’s begin answering our question with a little economics 101. We find ourselves today in a low interest rate environment. Central banks around the world are still wrestling with low growth for the most part. Loose monetary policy has been their main answer over the years. So what’s the upshot for you?

Basically, leaving money in the bank does you little good. In many of the major economies, interest paid on savings is less than the rate of inflation. As a natural result, people are searching for better alternatives to invest their money into, such as the well-established financial markets of Forex and stocks. This article will consider the pros and cons of Forex trading and stock trading.

Forex Market vs. Stock Market

There is no hard or fast answer to the question of which is better. In the comparison of Forex vs. stocks, there will be benefits and drawbacks for each market. It ultimately comes down to how important those features are to you personally. Let’s take a look at an overview of each market first, and then we can move on to drawing some conclusions about Forex vs. stock trading.

The Forex market is decentralized. It represents a trading network of participants from around the world. The large players in the Forex market include investment banks, central banks, hedge funds, and commercial companies.

The stock market is the overarching name given to the combined group of buyers and sellers of shares, or stocks. Shares in a company, as the name suggests, offer a share in the ownership. Usually, though not always, these transactions are conducted on stock exchanges. In order to raise capital, many companies choose to float shares of their stock.

Stock exchanges provide a transparent, regulated, and convenient marketplace for buyers to conduct business with sellers. Trading on these exchanges has historically been conducted by “open outcry,” but the trend in recent years has been strongly toward electronic trading.

The stock market is immensely popular, but it is exceeded in size by the Forex market, which is the largest financial market in the world. When we weigh up the Forex market vs the stock market in terms of size, Forex takes the round. Why do we care about the size? The greater the size of the Forex market, the greater its liquidity will be.

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Forex or Stocks: Comparing Liquidity

The Forex market is extremely liquid. This is a result of the vast number of participants involved in trading at any given time. Large, popular stocks can also be very liquid. Vodafone and Microsoft are prime examples. Though once you move away from the blue chips, stocks can become significantly less liquid.

Why do we care about liquidity?

Liquidity makes it easier to trade an instrument. Generally speaking, superior liquidity tends to equate to proportionally tighter spreads, and lower transaction costs. Let’s consider an actual Forex trading vs stock trading example, and compare some typical costs. Let’s use Microsoft as our liquid share, and EUR/USD as our liquid currency pair.

When trading Microsoft, you would pay:

  • A market spread
  • Commission to your broker

The price of Microsoft (at the time of writing) is around $52 a share. The market spread might typically range anywhere from 2 cents to 5 cents for Microsoft in normal market conditions. This is a range of roughly 0.04% to 0.09%. Commission rates vary from broker to broker, but you might pay 10 cents per share. The commission is paid upon the opening and the closing of the trade.

Now let’s compare that to EUR/USD. The most common type of retail FX trading is on a spread basis with no commission. This is the way in which the Trade.MT4 account works. On such an account, you might pay 1 pip of spread to trade EUR/USD, with no commission. If you are interested in trading with Admiral Markets, it’s important to note there is a selection of account types available that offer a variety of services.

With EUR/USD trading at 1.1190, this is a round-trip transaction cost of 0.0001/1/1.1190. Want to know what that works out to as a percentage? It’s less than 0.01%. In the case of this ‘Forex vs stock market scenario’, Forex has the upper hand. The round-trip spread cost of trading the FX position is less than the market spread on the share. And there’s more: once you factor in the share commission, the FX trade is even more cost effective. You can also view real market prices with a Demo Trading Account, as well as a live account.

Source: MetaTrader 4 – Demo Account – Trade Terminal & Market Watch

Narrow vs. Wide Focus

Perhaps a key difference when it comes to Forex vs stocks is the scope of the trader’s focus. When looking at an individual share, you can get away with concentrating on a fairly narrow selection of variables. While you are likely to take note of wider trends, factors directly affecting the company in question will be more important, along with the market forces within its specific sector. Relatively narrow metrics, such as the company’s debt levels, cash flows, earnings guidance, and so on, will be of chief importance.

With Forex, the focus is wider. A currency reflects the aggregated performance of its whole economy. FX traders are therefore more interested in macroeconomics. The focus will be more on general indicators such as unemployment, inflation, and GDP (Gross Domestic Product) rather than on the performance of private sectors. When you trade an FX pair, you are trading two currencies at once. You will always be buying one currency, while selling the other currency in the pair.

A fundamental trader therefore, factors in the performance of not just one economy, but two. Of course, you may focus on technical strategies instead of looking at fundamentals.

Forex vs. Stocks: Trading Times

The FX market is a 24-hour market, and it has no single central location; therefore, participants are spread across the globe; and there is always a part of the market that is in business hours. Trading a listed stock is limited, for the most part. Stock traders must adhere to the hours of the stock exchange. However, several major exchanges have introduced some form of extended trading hours. Stock traders may be able to participate during pre-market, and after-market trading periods.

These were once the domain of institutional investors only. Advances in electronic trading have made it increasingly accessible by retail investors also. The catch is that extended trading sessions remain notably low volume and non-liquid. When comparing volumes across a 24-hour period, FX wins again. If you are looking to trade at any given time, the comparison of trading Forex vs stocks is a simple one – Forex is the clear winner.

Margin and Leverage

A big advantage in favour of Forex trading vs stock trading is the superior leverage offered by Forex brokers. If you are physically trading stock, you are likely trading without the benefit of leverage. If you trade stocks using CFDs (Contracts For Difference), you can trade on margin. Usually, the best kind of leverage offered is 1:10. It is not unusual for FX brokers to offer 1:50 leverage, while Admiral Markets offers leverage of up to 1:30 for retail clients, and 1:500 for professional clients.

You can find all the details regarding retail and professional terms, the benefits, and the trade offs for each client category on the Admiral Markets website.

This offers the convenience of being able to command a larger position for a given cash deposit. Of course, it is important to be aware of how big your underlying position actually is, and to fully understand the risks involved. Leverage can be a powerful tool, but it can also put a quick stop to your activities.

Forex Trading vs. Stocks: Conclusion

So which should you go for in 2020? – Forex or stocks? In trading, the bottom line is always to stick with what works. This means going with what works best for you. If you know more about one market than the other, you might be better off staying in your area of your expertise. If you are naturally more interested in individual companies, then it would make sense for you to trade stocks.

If you think more in terms of macroeconomics, FX may suit you better. If you don’t have a particular inclination, but are mindful of transaction costs, FX might be the way to go. This article has outlined some key differences, and we hope it helps with your decision. Whichever side you choose, you will be able to trade it with Admiral Markets as we offer the ability to trade on Forex, CFDs, ETFs, Stocks and more with MetaTrader 4 Supreme Edition.

Trade With Admiral Markets

If you’re feeling inspired to start trading, or this article has provided some extra insight to your existing trading knowledge, you may be pleased to know that Admiral Markets provides the ability to trade with Forex and CFDs on up to 80+ currencies, with the latest market updates and technical analysis provided for FREE! Click the banner below to open your live account today!

About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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Key Concepts Trade Management

Expiration

Expiration is one of the differentiating factors between stocks and options. As long as a company is publicly traded, there is no expiration on shares. Options, on the other hand, have expirations.

Regular Monthly Expiration

All underlyings have standard monthly expirations. Generally, this is the third Friday of each month. Most underlings have a P.M. settlement, which means that you can trade that expiration up until the closing bell on Friday. Most traders use these standard monthly expirations, so they are generally the most liquid.

Some underlyings have irregular monthly expirations. For example, VIX expires on Wednesday, and it is A.M. settled. This means that the last day to trade VIX expiration is Tuesday. Regular SPX monthly expirations are on Friday, but they are A.M. settled. Therefore, the last day to trade a regular SPX monthly expiration is Thursday. It’s important to do a little research on your underlying, to ensure you know when the expiration really is.

A lot of the more liquid underlyings have weekly expirations that expire every Friday and are P.M. settled. This includes SPX, which makes that underlying more tricky to keep track of expiration and when the last day to trade it really is. Weekly expirations are usually less liquid than monthly expirations, but they can still be heavily traded. SPY is a great example of this. Weekly expirations that encompass earnings announcements are usually the most liquid.

What Happens at Expiration?

At expiration, one of two things happens depending on whether your option is in the money (ITM) or out of the money (OTM).

If an option is ITM, it will be converted to long or short shares of stock. Long calls and short puts will convert to long shares of stock. Long puts and short calls will convert to short shares of stock. Vertical spreads that are completely ITM will offset and result in either max profit or max loss depending on whether the spread is a long or short spread.

If an option is OTM, it will disappear from the account. Calls that are above the stock price & puts that are below the stock price at expiration are OTM, and will expire worthless and disappear. This results in no position, and no commission fees for closing the position!

See our page on Option Value, to see how different expirations affect the pricing of an option!

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