Forex versus Stocks
When trading Forex, you
can primarily focus your
attention on four major
currency pairs
(euro/U.S. dollar, U.S.
dollar/yen, British
pound/ U.S. Dollar, and
U.S. dollar/Swiss
franc), with the
potential to make a
decent profit. These
currency pairs are the
most commonly traded,
and the most liquid. You
can add about 34
second-tier currencies
for variation, but only
if you commit yourself
to the extra research
time. With the majors,
you can spend a lot less
time on your computer
researching potential
trades and more time on
other things you enjoy
doing.
When you consider
stocks, you have to
choose among 8,000
stocks: 4,500 on the New
York Stock Exchange and
3,500 on the NASDAQ. How
do you pick the stocks
you want to trade, and
how do you make the time
to continually research
the companies you do
pick?
Stocks are viewed by
many as an investment
vehicle, but in the past
10 years stocks have
taken on a much more
speculative role.
Securities face more and
more volatility every
day, especially with the
forces of day trading
and other factors you
can’t predict.
How many times have you
heard that a large
mutual fund was buying a
particular stock or
basket of stocks and
those trades created
unexpected movement in a
stock you held? Mutual
funds can also influence
the market at the end of
the fiscal year, just to
make the numbers look
better on a financial
report.
No matter what some
firms may claim, the
stock market can be
moved by large fund
buying and selling, and
the movement can take
place before you have
time to react. It is not
uncommon for a mutual
fund to sell or buy a
particular stock for a
few days in a row.
You won’t find these
types of problems in
spot currency trading.
The liquidity of the
market makes the
likelihood of any one
fund or bank controlling
a particular currency
very slim. Banks, hedge
funds, governmental
agencies, retail
currency conversion
houses, and individuals
are just some of the
participants in the spot
currency markets, which
are the most liquid
markets in the world.
Another big advantage
spot currency trading
offers to traders is
that there is no
middleman, so it costs
less to trade. If you
work directly with a
dealer, who is a primary
market-maker, you do not
deal through a
middleman. However,
brokers operate through
a bank or an FCM, so
they may charge
additional fees to cover
the added costs.
In the stock market, you
have centralized
exchanges, which means
you have middlemen who
run those exchanges, and
they need to be paid,
too. The cost of these
middlemen can be in both
time to do the trade and
money. Spot currency
trading doesn’t have any
middlemen. Traders can
interact directly with
the market maker for a
particular currency who
is responsible for
pricing the currency
pair. Forex traders get
quicker access and
cheaper costs than stock
trading.
Analysts and brokerage
firms are less likely to
influence the Forex
market than the stock
market. Too many
scandals have been
exposed since 2000 that
show how analysts told
clients to buy a stock
while calling it garbage
(and worse) in e-mails
behind the scenes. These
analyst cheerleaders
kept the Internet and
technology moving
upward, whereas stock
investors unknowingly
bought into companies
that ultimately proved
to be worthless.
The difference in
trading foreign currency
is that the primary
market for the currency
is driven by the world’s
largest banks and
foreign governments.
Analysts don’t drive the
flow of deals in the
foreign currency market.
All they can do is
analyze the flow that is
occurring.
If you trade in the
stock market, you’ve
probably found that
there are different
costs depending upon how
you trade. You pay more
fees if you call in your
order or ask for
specific types of
orders, such as a stop
or limit order to
minimize your risk. You
should not find
additional costs when
placing an order for
trading in foreign
currency.
Margins and leverage
opportunities are much
better in the Forex
market, too. In spot
trading, you can use
your profits on open
positions to add to
those positions. That’s
something you might wish
you could do when you
own a hot stock and want
to capitalize on the
profits you’ve made by
buying more of that
stock. Although it’s not
possible in stock
trading, you can do it
when trading spot
currency.
If you are concerned
about the risks of Forex
trading and prefer
less-risky investments,
such as bonds and mutual
funds, Forex trading is
probably not for you. If
avoidance of risk is
your primary investment
concern, you probably
won’t be comfortable
trading in the spot
currency market.
Whether you are trading
Forex, stock, or
futures, you must be
willing to take on risk
and must understand that
the money you use for
trading could be lost.
There is no insurance to
protect your money
{except occasionally
offered on stock
accounts), and you
should only trade with
money that you can
afford to lose.
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