11.Online forex trading vs foreign currency bank accounts
What is online forex trading
Online forex trading has become extremely popular, especially, margin trading. The most common entry point for investors opening an account is the following;
- Join a forex broker
- Deposit an initial capital
This initial deposit is also known as the “margin deposit”.
Investors would then view price quotes and trade forex on the online trading platform of the brokers, where most trades use leverage defaulted by brokers.
Investors can trade freely in the forex market with real-time exchange rates. Profit or loss of a transaction will be calculated in the investor’s account according to the price differences of opening and closing prices.
What is foreign currency bank account
Another method of forex trading, investors are only required to open a foreign currency account in their banks. When investors expect a foreign currency to appreciate or their local currency to depreciate, they can buy foreign currency with their local currency in the account. When the rate of the said foreign currency appreciates, they can sell it to earn the “profit”. This is the typical strategy “buy low, sell high”. Contrarily, if investors holding a foreign currency expect the local currency to appreciate, they would sell the foreign currency when the rate and timing are just right.
Differences between online forex trading & foreign currency bank account
Online forex trading is a kind of margin trading and the rules of trading allow long and short positions. Investors can go short (short-selling, sell first buy later) if they expect that currency to go downward. In general, compared to foreign currency account holders at the bank, they have more trading opportunities and the trading cycle is usually shorter.
Related Article: What is a long and short position?
No physical settlement
Online forex trading is in the form of contractual obligation. It has neither physical delivery of the underlying assets and nor settlement date. It is contrary to holding a bank account: investors are allowed to save or withdraw banknotes of the said foreign currencies because their foreign currency accounts are maintained in the form of savings.
Higher or lower cost
To accommodate frequent trading, online forex trading usually comes with an extremely low transactional cost. Forex brokers are incentivised to offer extremely competitive costs in trading such as bid-ask spreads of price quotes. Foreign currency transactions at banks, however, involve extra charges and wider spread. This is why it comes with a higher cost compared to online forex trading.
Online forex trading is open 24 hours throughout the year for investors to easily enter in and out of markets. Contrarily, buying and selling of foreign currencies services offered by banks are not necessarily opened for 24 hours a day or such services are not as ubiquitous.
Online forex trading usually involves leverage, whereby investors are allowed to multiply trading volume with limited capital. Forex brokers usually offer a leverage ratio of 1:100 or even higher. But, leverage is not offered by banks in normal situations, which means that investors are required to start their investment with more capital.
To put it simply, transactions of buying and selling foreign currencies are normally related to our daily life, including a fixed deposit of a foreign currency, currency exchange for overseas trips and studies. Online forex trading, on the other hand, is usually talking about a more aggressive investment approach.
Next Article: 12. What is the Dollar Index in forex?
- The Best Trading Platform Award 2019 from Financial Weekly, Regulated by FCA & FSA.
- 100+ trading assets, including Forex, Stocks, Indices, Gold, Crude Oil, etc.
- 3 types of trading accounts to meet the needs of every customer
- 0 commission, low spread, leverage ratio up to 1:2000
- Powerful trading platform that executes 50,000 orders/s
- Open an account with a minimum deposit of $50
- 24-hour Customer Service
Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted by this article. Please be firm in your thinking and do the corresponding risk control.