Today, opening a Forex brokerage account is about much more than trading currencies. With more and more brokers offering an increasingly wide range of assets beyond currency pairs, it is easy to either feel like a kid in a candy store, or completely overwhelmed. These states of mind can be unhealthy for you and your trading account, so it pays to take a closer look at what your broker – or your next Forex broker – is putting on the table.

Forex vs Futures vs CFDs

Don't be intimidated or confused by terminology that seems to have nothing to do with the assets themselves, like “spot”, “CFDs” or “futures”. What you really need to know first is what asset is underneath it. For example, you might want to buy Gold. You could buy Spot Gold, the price of which will be the same as the physical asset itself. You could buy a Gold CFD or Gold Futures, but the price fluctuations are likely to be extremely similar.

When you trade with a Forex broker, you are never going to take possession of the actual assets you buy or sell. Therefore it does not really matter much in itself whether you are buying spot or CFD or Futures. The debate about CFDs vs Forex vs Futures is really a waste of time and not worth worrying about. Spot and CFD are essentially the same thing at this level. Differences in the price movements should only occur where a CFD is leveraged itself, which is not very common. Futures are a little different as they can be less liquid and their price is influenced more by market forecasts. The important thing is that you check how much each instrument costs you to trade and decide what kinds of assets you want to be trading.

Costs of Trading

There are two things which must be checked in order to calculate how much something costs to trade. First of all, check the typical spread (the difference at any time between the buy and the sell price). Add to this spread any additional commission that is charged. Then divide that sum by the current market price. You will have a percentage. Make these calculations for a few spot Forex currency pairs, a range of commodities, bonds, ETFs, stock indices etc. Go through the entire menu that your broker offers and compare the percentages you have calculated.

When it comes to Forex vs Futures vs CFDs, you will almost certainly find that the major spot Forex pairs are the cheapest to trade. It is likely that the more unusual the instrument, as a rule, the more expensive it will be for you to trade it. CFDs will probably be more expensive than spot Forex, and in turn ETFs will probably be more expensive than most CFDs. Unfortunately, the cost does not end there. Forex brokers also charge extra to hold most of these trades overnight, but very often do not advertise these charges explicitly on their website. If so, contact them and they should be happy to tell you what their rates currently are. Make the calculations again. You will then have a table of all the assets you are considering trading with the percentage cost you will pay per trade and per night. Keep these costs in mind.

Islamic Forex Account

If your Forex broker offers an Islamic Forex account, they will not charge you for holding trades overnight. However, they will almost certainly add to the spreads and commissions.

Deciding What to Trade

Now you are well positioned to consider what you want to trade beyond spot Forex, if anything. There are two major potential advantages to playing a wide field.

Modern Portfolio Theory, which is still widely accepted as accurate, shows that total risk is decreased the further a portfolio is diversified, i.e. the more different types of assets you are trading, the less your total risk should be. While it is good to be diversified, unless your account is quite big, you are unlikely to be opening long-term trades in 20 different assets and sitting back for a year, which is where the benefits of Modern Portfolio Theory really begin. So diversification in its typical sense is not likely to be very helpful for traders like you.

The true benefit to a retail trader in having a wide field of tradeable assets lies in the ability it gives to pick and choose what to trade. You will get the most out of trading if you follow what is hot right now. One week it might be the Japanese stock market. The next week it might be EUR/USD. The month after that it could be Gold or Oil (there are a wide range of ETF Gold and ETF Oil if spot is not convenient for whatever reason), or some more obscure asset that is best accessed through an ETF. Having an account with a Forex broker that offers all these different instruments means that you can always be where the action is and trade the “hot hand”. Just don't be like the kid in the candy store and overdose on sugar! Remember also that some assets are going to cost you more to trade than others, so take the time to make those calculations and keep them in mind. If you have a choice of a few hot assets to trade, you can pick the ones that cost you less.