Hi Rubb, By definition, zero sum games like the Futures or the Forex markets do not create wealth (except for the brokers of course!), they just transfer money from the losers to the winners. On the other hand, the stock market creates real wealth, in the long run all the traders could theoretically make money, due to the never ending upside nature of the stock market.
Totally agree with you, mate, theoretically speaking this is the truth. I believe you are right. Interesting topic, do you think it actually makes any difference on the real world ? Let me explain myself, while futures and forex markets are a zero sum game or even negative sum game if taking some additional factors into consideration, do you think this affects in a real way the speculation in these markets ? Simple put, there is a large belief out there, specially among stock traders that spot forex is much harder to trade profitable over the long haul than the stock market. What do you think about it ? I personally don't think so. Even in positive sum game enviroments like the stock market, there are unprofitable speculators and surely blown up accounts. In other words, I don't really consider this zero sum game theory as a pro nor a con as I believe it really doesn't make any difference for the speculator in search of a profit. What do you think ? Thanks for your opinion, regards.
Forex or futures trading are only a zero sum game if you take into account pure speculation, but when you take into account hedging, they no longer are.
Pros and Cons of ETFs PROS For the typical investor, ETFs line up very well with the fundamentals of good investing. They are diversified, low cost and tax efficient. Diversification is almost automatic. By regulation, a domestic ETF must hold at least 13 securities and cannot invest more than 30% of the fund in any one security or more than 65% in the 5 most-heavily weighted securities. For international ETFs, the rule is a minimum of 20 securities and a limit of 25% in one and 60% in the top 5. Most ETFs hold many more securities and have a maximum concentration of 5 to 10% of the fund. ETFs are very low cost relative to their mutual fund cousins. Depending on which study you cite, ETFs have an average expense ratio of 0.4% of assets and no sales loads. Compare that to an annual expense ratio of 1.4% for mutual funds, many of which also come with sales loads. Although a 1% per year difference may not sound like much, it adds up over time. See our post on the free tool from FINRA that will calculate the cost differences between different funds over time. In our example, we calculated a $50,000 - $65,000 savings over a 20 year period. ETFs are tax efficient because they operate differently than mutual funds. If you buy a mutual fund, you are trading with the fund manager. Share redemptions causes the manager to sell investments to raise cash and creates a tax liability for the remaining shareholders regardless of how long they have held the fund's shares. This is a major problem for mutual fund investors who paid nearly $34 billion in taxes in 2007. ETF managers don't redeem shares for cash - they simply transfer a basket of securities to the redeeming party in a tax-free transaction. As a result, the remaining beneficial owners of the ETF aren't handed an unexpected tax liability. As an individual investor, you will typically buy and sell ETF shares on a secondary market rather than trade directly with the ETF sponsor. A taxable capital gains event will occur only when you sell the ETF (there are exceptions - review the ETF's prospectus with your tax advisor). There are several other pros to investing with ETFs. They have opened up investment opportunities previously limited to the realm of hedge fund managers and institutions - for example, you can execute a currency strategy very popular with institutions with the PowerShares DB G10 Currency Harvest Fund (Amex: DBV) - see our earlier post. ETFs make it very easy to pursue strategies that used to be hard to execute - e.g. buy/write strategies, borrowing shares for shorting purposes and investing in hard assets such as gold or silver. CONS There are cons associated with ETFs. For example, because ETF investing typically requires paying a commission to a broker, investing small amounts of money on a regular basis can be cost prohibitive. Some brokers are working to fix this. Because ETFs are relatively new, they do not adequately cover all investment options. For example, although the markets for stocks and bonds are roughly the same size, the number of fixed income ETFs is only a fraction of equity ETFS. This will likely correct itself as new ETFs pass through the regulatory approval process and come to market. Finally, specialized funds such as leveraged and inverse ETFs are very powerful investment tools that can do a lot of damage if not used wisely - best to leave these in the hands of your financial advisor. http://www.etfmarketpro.com/Pros-and-Cons-of-ETFs.html Pros And Cons Of U.S. Exchange Traded Funds by Marc Davis on December 16, 2011 Exchange Traded Funds (ETFs) combine features of an index fund and a stock traded on a major exchange. Many are inexpensive, with low management fees, and are tax efficient. An ETF is basically a number of stocks packaged to sell as a single equity. Unlike a mutual fund, however, an ETF can be sold at any time through the trading day, just like a stock. ETFs were initially created to provide a trading vehicle which reflected the price of different indexes. The SPDR, known as the "Spider," for example, tracks stocks in the S&P 500, an index of the 500 largest U.S. companies. Today, there are literally hundreds of ETFs traded regularly on major exchanges, and represent not only stock indexes, but a variety of other industries and business sectors. There are both positive and negative aspects of ETFs, a smart investor should consider both elements before investing. PROS Liquidity The following applies to both domestic and foreign ETFs traded on U.S. markets. Liquidity is a positive aspect of ETFs, meaning an investor can sell his or her holdings with little difficulty and easily retrieve money from the sale. Volatility Volatility is reduced in an EFT because it embodies a number of stocks in a specific market sector rather than just one. A single stock may be more likely to decline substantially due to some internal management problem, or because of the cost of servicing debt has risen, eroding margins and the bottom line, or from some other misstep or misfortune. Although stocks of an entire sector may suffer a simultaneous price decline, often competitors within the sector may prosper as the bottom line of their business rivals shrink or go red. Market Orders May be Used ETFs may be sold through market orders, meaning, stop-loss orders, market or limit orders. These permit investors to trade ETFs as if they were stocks, and provide risk management opportunities and better chances of profitability when day trading. ETFs may also be shorted, meaning they can be sold without ownership at the time of sale and bought back later for delivery to the buyer at a lower price, for a trading profit. Bond ETFs Bond ETFs are less volatile and offers a reasonably good means of diversifying holdings into fixed income instruments. These can include U.S. Treasury Bonds, or high-rated corporate bonds, providing stability and safety. Diversity There are more than 600 ETFs currently traded on the exchanges. Among them are large cap ETFs, packages of large corporations with both value and growth potential. Some small cap ETFs are broadly diversified across business sectors, giving investors an "index" fund of selected companies. There are also Real Estate Investment Trusts (REITs), which have been packaged into ETFs as well. REITs invest in shopping malls, commercial real estate, hotels, amusement parks and mortgages on commercial property. Tax Efficiency Because ETF shares are bought and sold on an exchange, just like stocks, the transactions take place between investors who either own the ETFs â the sellers â or who want to buy the shares â the buyers. So, there is no actual sale of the securities in the ETF package. If there is no such sale, there is no capital gains tax liability incurred. There are other circumstances, however, in which an ETF must sell some shares from its package, thereby resulting in capital gains. Investors are urged to consult with their tax accountants or attorneys to advise on complex tax matters. CONS Commissions and Trading Fees Experts have argued that ETFs trade as short-term speculations. Frequent commissions and other trading costs, therefore, erode investor returns. Limited Diversification Most ETFs, say some experts, do not provide sufficient diversification. Other authorities, with opposing views, say that there are widely diversified ETFs, and holding them for the long term can produce profits. The Unknown Index Factor ETFs tied to unknown or untested indexes, are a major negative aspect of investing in these instruments, say many investment advisors. The Bottom Line ETFs generally offer a low cost, widely diverse, tax efficient method of investing across a single business sector, or in bonds or real estate, or in a stock or bond index, providing even wider diversity. Commissions and management fees are relatively low and ETFs may be included in most tax-deferred retirement accounts. On the negative side of the ledger are ETFs which trade frequently, incurring commissions and fees; limited diversification in some ETFs; and, ETFs tied to unknown and or untested indexes. http://www.investopedia.com/financial-edge/1211/pros-and-cons-of-u.s.-exchange-traded-funds.aspx
ETFs versus Mutual Funds Pros of ETFs 1. Generally lower expense ratios and can purchase less than the minimums needed for some mutual funds. 2. More tax-efficient than even identical mutual funds (except for Vanguard's): ETFs can get rid of capital gains when shares are redeemed, resulting in less or no capital gain distributions. 3. A good broker like WellsFargo or Fidelity make tax-loss harvesting and bookkeeping trivial since one can easily use specific share id (but they can do this with mutual fund shares as well). 4. Can use limit orders so you know exactly what you are paying. 5. Can purchase during the day at known prices without waiting for the close of the market session. 6. Asset classes available that an entity like Vanguard does not have in their mutual funds. 7. One can take advantage of occasional anomalies and purchase shares at a lower than expected price. 8. No frequent trading restrictions. Cons of ETFs 1. Some brokers charge a commission. Not a problem with brokers which do not charge a commission. 2. The bid-ask spread confuses some people, but we have seen it can be small or one can be taken advantage of. 3. No real way to get a fair price when the market is closed. 4. Must buy integral number of shares ... cannot typically buy fractional shares (though some brokers allow this, but they are not no-commission brokers). 5. Automatic investment is problematic. Your broker may have this functionality, but would you trust their prices? (Do not confuse automatic investment with automatic re-investment of distributions.) 6. Some possible friction when tax-loss harvesting since one usually sells one fund and then buys another. (It is possible to buy first and double-up, then sell later. This can be done with mutual funds as well.) 7. One can stupidly submit orders to sell when the market is closed or use stop-loss orders that get taken advantage of. Or one can make other errors entering orders. Pros of mutual funds 1. Can buy fractional shares; all your money goes into shares without leftovers. 2. Automatic investment is easy. 3. Trades execute at end-of-day net asset value (NAV). 4. Exchange from one fund to another has no friction since both sell & buy done at end-of-day NAV. 5. Can submit orders when the market is closed. You will get a fair price at the next available NAV. 6. Dividends re-invested the same day they are paid at NAV. Cons of mutual funds 1. Expense ratios can be (not always) higher than corresponding ETF. 2. No intraday transactions. 3. Usually must submit the order before the end of the trading day. The actual price is not known (but is legally guaranteed to be the NAV). 4. Lack of some asset classes without excessive fees. 5. Some funds have trading restrictions (cannot re-buy after selling for NN days). 6. Less portable than ETFs: another broker may not provide access to a certain fund, when transferring or donating assets in-kind. General remarks Both mutual funds and ETFs allow free automatic re-investment of distributions. It is really a broker function --- not a function of the investment. Both ETFs and mutual funds can be tax efficient ... or not. Each investor will need to assign value to the advantages important to them and subtract value of the disadvantages important to them. ETFs are not a slam dunk. Neither are mutual funds. http://www.bogleheads.org/wiki/ETFs_vs_mutual_funds
When it comes down to a transaction, how do you distinguish a hedger from a speculator? Only if you consider an extended game that includes physical commodity trading then it may not be zero-sum. But that is not the game played by speculators. For speculators it is zero-sum unless they occasionally accept physical delivery. Anyway, a lot of ink has been wasted debating this and the best way to look at it is from a statistical viewpoint.This blog is quite revealing because it is not just talk. No matter whether the distribution is positively skewed, after you add a small spread/commsion/slippage the game becomes a negative-sum and this is all that matters IMO.
Well, that's what i said. Not sure if i care if a game is negative sum anyway. Over enough transactions, money flows from the unskilled to the skilled.
Currency Futures vs. Spot Forex Accounts You will see a lot of marketing materials out there explaining why the spot market is so much better and cheaper than the currency futures market, but how much of it is fact and how much is hype? What are the real differences between these two closely related markets? Is it really cheaper to trade spot forex? Arenât there also advantages to trading futures? This is an important topic because so many of the differences are related to trading costs, which is often a neglected subject among both new and experienced traders. Warning: It is very common to see incorrect or misleading information about futures and the trading costs associated with them in a spot forex dealerâs marketing materials, or in the materials that some forex educational sites give you that are just copied from the dealerâs propaganda. When in doubt, check it out. If what you read here doesnât jibe with what you previously understood, you may have been given faulty information. Letâs begin this lesson by analyzing the major attributes of each marketâfutures and spot. Doing so will help us determine if either market really has an advantage. We will be ignoring some non-issues like leverage rates, expiration and âguaranteedâ orders. 1. 24 Hour Market â Advantage: Neither Some spot forex advertising makes it seem like the only place you can trade 24 / 7 is in the spot forex market. That is not actually true. Both currency futures and spot forex effectively trade 23-24 hours a day, 5 days per week. The market is essentially closed from Friday afternoon through Sunday afternoon in North America. 2. Spread â Advantage: Currency Futures The spread in the currency futures market is not fixed. Depending on the liquidity of the market at the time, the spread can be one pip or less, and an effective limit order may cut the spread to nothing. In the spot forex market, you can have a variable spread like this, which may widen with market conditions, or a fixed spread, which does not change but is usually wider (2-3 pips on the majors on average) than a variable spread. It is important to note that some spot dealers offer spreads on some pairs that are below one pip, but that is not the case for all of the pairs they offer. For example, a very good dealer is currently showing their average spread on the EUR/USD as 0.9 pips. That is lower than the currency futures market by 0.1 pips. However, they are showing an average spread of 2.5 pips on the GBP/USD, which is a full pip higher than the average for the GBP/USD currency futures contract. On average, the spread in the futures market is narrower across the majors and major crosses than the spot market because the futures market has more liquidity and price competition than an individual dealer. 3. Commissions â Advantage: Spot Forex Spot forex dealers do not usually charge commissions. The spread is where they make their money, which is one reason it is a little wider on average than the currency futures market. However, letâs put this in perspective. A quick survey of good futures brokers put the average commission costs at $3.15 per side. That means an entry and exit (round trip) would cost $6.30 per contract, or 6/10ths of a pip. Once commissions are added to the spread cost above, the advantages between currency futures versus spot forex become much closer to neutral. 4. Flexibility â Advantage: Spot Forex Spot forex dealers are extremely flexible on lot sizes. This is great since a full 100K lot may be too large for many new traders. Some dealers will slice the lot sizes anywhere from 10,000K to 1,000K. The currency futures market generally has two lot sizes. A full-size contract is usually a little larger than the 100K lot in the spot market. A mini contract, which is only available on some pairs, is usually about one-half the size of a full-size contract. Larger lot sizes can make money management in a small account extremely difficult and may be the only clear advantage spot forex has over the currency futures market. 5. Roll-Over Interest vs. Carrying Charges â Advantage: Currency Futures Because one of the ways a forex dealer makes money is by trimming the interest payment or increasing the interest charge on a particular pair, the roll-over premium you receive from a futures contract tends to be a little higher than what you would receive from a spot forex contract. However, the cost or benefit of this interest premium is integrated into the price of the futures contract itself, which makes it harder to see at first glance. Hereâs how it works. Imagine that you are 45 days away from the GBP/USD futures contract expiring. That contractâs current price is 1.9811 but the spot price is 1.9866. This difference (also known as the cost of carry) is created by the value of the interest premium that will accrue between now and expiration. By the time this contract expires in 45 days, the futures price will equal the current spot price exactly. That means that if the spot price held steady, you would make the equivalent of 55 pips as the futures price came up from 1.9811 to meet the spot price at 1.9866. By contrast, the highest rollover rate we could find from a forex dealer on the GBP/USD would pay the equivalent of 38 pips in interest premium during the same 45 day period. Similarly, the charges for being on the non-interest paying side of the transaction is less in the futures market than with a spot forex dealer. 6. Transparency â Advantage: Currency Futures Currency futures are exchange traded, which means that you can see order flow, volume, open interest and outstanding orders. Forex dealers do not share that information. And because the market is so distributed, information available from any one dealer is probably not comprehensive enough to give a clear picture of what is happening in the market as a whole. To get an idea of the volume of contracts that you can glean information from in the currency futures market, take a look at thisâ$83 billion worth of currency futures trade on the CME exchange every day alone. Contrast that with the largest retail forex dealer in the market who only trades $11 billion a day in total notional value. Summary The fact that forex dealers will split up a forex lot into very small slices makes the spot forex market the hands down winner for small traders. Larger retail traders, on the other hand, should seriously consider the futures market as an alternative to the spot forex market. Trading costs are nearly identical, the exchange is more transparent, the product breadth is equivalent and interest premiums are better. Every trader should realize that trading cost differences are not just limited to whether or not you are paying commissions. Trading costs include average spread, commissions and interest premiums or charges. When looked at together, these two markets look a lot more similar than you may have thought. Thoughts There is a lot of debate about the âfutureâ of the currency market. Will the OTC dealers win or will the innovations and size of the futures exchanges crush the remaining benefits offered by the spot dealers? During the next couple of years, donât be surprised to see exchanges begin listing flexible spot contracts along side futures contracts. © 2008 â 2014 Learning Markets, LLC | All Rights Reserved http://www.learningmarkets.com/forex-futures-vs-spot-forex-accounts/
I'm long GBPUSD (spot forex), but my dealer is not paying me ANY interest on it. I should have gone with doing a future. Thanks for the info, going to swap my position.