Stocks vs Forex: What Should You Trade

Stocks vs Forex: What Should You Trade
December 20, 2011 Tyson Clayton

Forex market investors already know the difference. Many other market investors may know the difference. Those who are new to investing probably don’t know the difference— and they might even think that investing is investing and the markets are basically all the same. And, they couldn’t be more wrong.

If and when you decide to begin investing, knowing the differences in any financial markets is step one. Don’t even consider investing until you have the facts.

Video: Forex vs Stocks

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What Every Investor Should Know

The foreign currency exchange (forex) is the largest financial market in the world and dwarfs any other stock or bond market. Over 40 times larger than the U.S. stock market, the forex sees a daily volume of nearly $4 trillion per day.

The forex market is open longer than the stock market. The forex trades 24 hours a day, 5-1/2 days per week. More market hours equal availability and convenience. Bottom line: more time to trade.

Forex trading is more direct than stocks. There is no middleman. This flexibility allows trades to be placed where you want when you want. Cutting out the middleman not only gives you such flexibility when trading, but it means there are minimal to no commissions or fees on trades leaving you more margin left for a better profit.

The absence of a middleman also means the instant execution of online trading orders giving you the ability to get in and out of trades in minutes and the ability to hold positions for days, weeks, or even months.

Shorting the market is the ability to sell first and buy second. This benefit is two-fold because the markets maintain balance and investors can generate profit even if the market is down. While other markets can be a dangerous place for such short-term speculation, the forex is ideal.

The amount of leverage in the forex market is higher than the stock market and that can be appealing to any level of trader. Perks such as no investment capital necessary and increased buying power can be powerful trading tools. Higher leverage increases your buying capability and makes it easier to earn a large amount from a small amount.

What it takes Wall Street an entire month to trade, the forex market trades in one day. The more buyers/sellers, the more efficient the market is. Such liquidity increases flexibility when trading and improves order execution.

While fundamental announcements are always important information indicators when trading, the mood swings of the stock market are next to non-existent in the forex market. This is mainly due to the sheer size of the forex market and the fact that it is a non-centralized exchange.

Thousands of stocks to watch? Or, a few major currencies to observe? This is a no-brainer. Instead of spending your valuable time researching thousands of stocks, you have the flexibility to focus on only a few major currencies in the forex market. There is also more historical and trend data available for analysis.

By investing outside of the U.S. stock market, you achieve true diversification by including foreign currency investments into your portfolio. Unlike the NYSE where you only buy the U.S. dollar, the forex market includes all of the world’s currencies.

Unlike other markets, the forex market is a global open market. Because it is not easily prone to market manipulation, the forex market is virtually immune to a recession. Money can be made on any directional movements—up, down, long or short.

A currency does not have to be increasing in value for it to be profitable. In contrast to other markets, the forex market is not affected by just one country’s government or industries. Major currencies simply don’t fail.

Risk Involved

There is guaranteed limited risk in the forex. Some find this hard to believe, but it’s true. What this essentially means is that you will not lose more than what you have invested initially. When compared to other markets, you could incur a loss bigger than what you had in your account, making you liable for any resulting deficit in your account.

In the forex market, you only lose the balance of your trading account. Unlike the stock market, you cannot go into debt for a loss.

So, now that you know the differences in the foreign exchange market compared to the other markets, you can feel more sure about where and how to invest.

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