The two major markets are the Foreign exchange market and the well known stock markets. Forex vs stocks? well In this chapter, we’re going to look at the advantages of trading the Forex market over stocks. Why we trade Forex and why many other traders and investors are making the switch.
If you mention trading to family or friends, they are most likely going to assume you’re talking about the stock market, not many people are actually aware of the Forex market. So if the stock market is so popular, why would someone choose to trade on the Foreign Exchange market? Here are the reasons why we, and many others favour the Forex market over the stock market.
24 HOUR MARKET
open 24 hours forex vs stocksThe number one argument for Forex vs Stocks is the whole open 24 hours deal. When trading stocks you are limited to their relative exchange’s trading hours. For example, the New York Stock exchange only operates Mon-Fri during New York business hours, and the London FTSE is only open for trade during the London business hours.
The foreign exchange market however opens around 8am Sydney time on a Monday in Australia, and closes around 5pm New York time in the United States on a America Friday. This basically means that Forex is a 24 hour market open during the 5 day business week.
This flexibility is great for traders; you don’t have to be available for any specific time frame. The freedom to trade when you want allows you to integrate trading into your busy life easily. Especially when you use end of day trading strategies.
CHEAPER TO TRADE
Forex brokers usually don’t charge commissions or transaction fees. They make their money through spreads (by selling currency to you at a slightly higher price than what they can buy it for), which are dirt cheap when compared to the stock market.
Brokers are able to offer cheap spreads and make good returns due to the sheer volume of Forex transactions that they experience on a daily basis. The truth is that Forex is the cheapest market to trade in the world.
To begin trading stocks you need to have a lot of initial capital to be able to make reasonable returns. This is because the stock market offers very low leverage. Leverage is the ability to use your money to control a larger sum of “borrowed” money in the market. The stock market only offers about 1:2 leverage, which means with $1000 you could control $2000 in an open position.
Forex brokers generally have a larger range of leverage options available. A leverage ratio of 1:100 will allow you to control $100,000 in the market with only $1000 of your capital. It’s not uncommon for brokers to offer leverages up to 1:500 which means you can control $100,000 worth of currency with only $200.
The New York stock exchange currently has about 2800 different stocks listed, that’s 2800 different markets to choose to trade from. There are another 2679 stocks listed on the NASDAQ exchange, so you can see how picking a stock to trade can be overwhelming.
The Forex market’s focus is around the major global currencies.
The United States Dollar (USD)
The EURO (EUR)
The Great British Pound (GBP)
The Japanese Yen (JPY)
The Swiss Franc (CHF)
The Australian Dollar (AUD)
The Canadian Dollar (CAD)
It’s much easier to follow these 7 major currencies than to try keep up to date with thousands of stocks.
LESS SUSCEPTIBLE TO MANIPULATION
The stock market is vulnerable to price manipulation. Large companies can force certain stocks to move by buying or selling them in large amounts, driving the smaller traders out of their positions.
The stock market is also more susceptible to analyst’s ‘recommendations’ and news events that may affect that company’s perceived performance or reputation. News, or rumours, can in turn cause a particular company’s stocks to unexpectedly move rapidly in one direction.
Because of the epic scale of the Forex market, no one company or bank can forcefully move the Forex market like they can in the stock exchange. The amount of money required to force a currency to move is just beyond the capabilities of large companies, even single banks cannot force currency prices to move in their favour. In the debate of Forex vs stocks, the Forex market really shines here.
Only a country’s central bank has the power to manipulate currency prices, and that’s using the full power of the country’s economy. Sometimes central banks forcefully devaluate their home currency to increase their import/export sector, which in turn will boost the economy.
NO RESTRICTIONS ON SHORT SELLING.
During stock market crashes it is possible for short selling bans to be put in place by the stock exchange. This means you cannot open any new short trades. During market crashes it is very hard to find buyers for your crashing stock.
stressed stock traderImagine you are currently holding stocks, and you see the market collapsing. The first thing you want to do is sell off your stocks before they lose too much value. No one wants to buy stocks in the middle of market crashes. Unless you can find a willing buyer for your stock you may be forced to sit by and watch your money disappear. If you can find a buyer, it is most likely going to be at a very cheap price.
In the Forex market, there is no shame in shorting during market crashes. In fact, Forex traders can make fast money when the markets are plummeting in chaos. Currencies are traded in pairs. You’re always buying one currency to sell the other. One could go as far to say that you’re always a bull and a bear at the same time.
So in the overall argument of Forex vs stocks, I find myself being a passionate Forex trader due to the advantages it offers.