The differences between forex and futures trading in the UK
The UK’s financial markets present many options for those looking to trade. Two popular types of trading in the UK are forex and futures. Both provide opportunities for investors to make money in different ways, depending on their risk tolerance and trading strategy. While both offer distinct advantages, critical differences must be considered when deciding which suits you. This article will explore key differences between forex and futures trading in the UK.
Regarding liquidity, forex trading is well ahead of futures trading. Forex markets are the largest and most liquid in the world, with a daily turnover exceeding £5 trillion. Therefore, traders can quickly enter and exit positions within seconds, making it ideal for those who want quick action. Additionally, because of their immense size, forex markets tend to be less volatile than other financial markets, such as stocks and futures.
In contrast, futures markets are far smaller and less liquid than forex markets. The lack of liquidity can make entering and exiting trades difficult, as there may not be enough buyers or sellers to support large orders without impacting market prices. Futures contracts also have expiration dates which limit how long investors can hold them, making it difficult to ride out market volatility.
Different regulatory bodies oversee forex and futures trading in the UK. Forex trading is regulated by the Financial Conduct Authority (FCA). The FCA imposes strict requirements on forex brokers to protect traders from fraud and manipulation. Futures trading is overseen by the London Metal Exchange (LME), which also has regulations for futures traders.
The regulation of forex markets helps protect traders from market abuse, ensuring fair prices and a safe environment for investing. On the other hand, the LME’s rules are less stringent than those imposed by the FCA, meaning that futures markets can be more vulnerable to manipulation and fraud.
Forex trading allows traders to use leverage to increase their exposure and magnify potential gains from successful trades. Leverage can sometimes be as much as 1:100, meaning that a trader only needs to put down one-tenth of the total value of the trade. It makes forex particularly attractive for those who want to take advantage of small price movements with limited capital.
In contrast, futures markets offer less generous leverage than forex markets, usually capping out at around 1:20 or lower. It reduces potential profits and limits losses if the market moves against you. It’s important to note that while leverage can increase returns, it can also amplify losses.
Another difference between forex and futures trading is the cost. Forex brokers typically charge a commission, spread (the difference between the bid and ask price) or both. Commissions are usually charged as a percentage of the trade’s total value, while spreads are usually much smaller.
Futures traders must pay an exchange fee for each contract traded, which can add up quickly if you’re a frequent trader. Additionally, most futures brokers also charge an additional fee known as ‘brokerage’, which must be paid in addition to the exchange fees.
Taxes on forex and futures trading can vary depending on the type of trader. For example, UK resident traders who trade through a spread betting account are exempt from declaring any profits as they are not subject to capital gains or income tax. On the other hand, traders who use a retail foreign exchange broker must declare their gains in their annual tax returns.
Similarly, UK residents trading futures contracts have different taxation rules depending on whether they are classified as an ‘investor’ or a ‘professional trader’. If the former, profits may be subject to capital gains or income taxes, while professional traders may need to pay stamp duty reserve tax and national insurance contributions.
Generally speaking, forex traders can access a wide range of trading platforms, including those provided by their broker and third-party services. Many brokers also offer mobile apps that allow traders to access the markets on the go and how-to guides.
On the other hand, futures trading is usually restricted to specific trading platforms provided by exchanges or brokers. Traders must also adhere to exchange rules regarding order types, margin requirements and risk management tools.