22/07/2014
Forex vs Stocks
Forex Trading vs Stock Trading
often asked why should any trader choose forex trading over stock trading. One of the biggest reasons is called forex leverage.
Leverage
In stock trading, you can trade with leverage 2:1 usually, and you have to fill out an application and be approved and there are very specific regulations on who can trade with leverage, etc.
Forex trading is very different. To qualify to trade with leverage you merely have to open a forex trading account and you're good to go. In the United States, you'll be stuck with 50:1 leverage, but in other countries you can get as much as 1000:1 leverage for your trading. Regardless of the amount of forex leverage you can use in your country, it's going to be so much more than you would have been able to use in stock trading.
When you trade stocks, you are trading shares of companies that cost anywhere from a few dollars to hundreds of dollars. There is a reasonably limited amount of stock on hand, and you only have to be concerned with the company's ability to make money.
Trading currencies is another world compared to that. The supply of a country's currency can fluctuate, and there is always a large amount of currency available to buy or sell, this makes currency buying or selling extremely liquid. In currency trading, currencies are always quoted in pairs, so not only do you have to be concerned with the economic health of an entire country, but you also have to take into consideration the economic health of the country you are trading against.
Fundamental Considerations
When it comes to forex trading vs stock trading, the fundamentals are handled different. For instance, if you buy a share of Intel stock, all you have to care about is whether Intel stock will get more valuable, or if Intel will at least continue to make the same amount of money in the future. When you want to trade a currency whether it's buy or sell, you have to consider the country you are comparing it against. Does one country have more job growth than another, or better GDP, or political prospects? These are all things that can impact the value of a currency.
Liquidity
As mentioned before, outstanding shares of stocks are limited compared to the amount of a currency that might be out there floating around. A large stock purchase might be 10,000 shares, which may actually impact the stock price a little when you buy it. On the other hand, when it comes to currencies, it may take a 10 billion dollar purchase to impact the price of a currency.
Currency markets are also open much more often than stock markets. When trading stocks you are limited to whatever the hours of the exchange are. Forex trading can be done 6 days a week, 24 hours a day because there is no centralized exchange. This makes it much easier to get in and out of currency positions on a whim.
No Bear Markets in Forex Trading
When a stock market declines, you can make money by shorting, but it can be ultra risky and the regulations are very specific. In forex trading, you can go short on a currency pair just as easy as you can go long with no particular regulation restrictions. When one currency is in a "bear market" the other currency in the pair may be in a "bull market" so there are really no bear markets in currency trading.
More Freedom
Stock trading has many regulations and limits, forex trading does not have the same issues. There are some regulations in forex, but nothing like what regulates the stock market. Forex traders are free to make trades the way they want to, going long or short on a whim, and trading as large as they want to. With stock trading, there are limits on when you can place trades, how you can trade, and what you can say about it. Forex trading on the other hand is very unrestricted, and you have the advantage of using leverage.
It's your choice
When it comes down to it, it's your choice and sometimes it's just easier to trade what you know. Trading forex provides more opportunities than other similar markets, but requires a bit of learning curve for investors. It's something that every investor should at least consider as part of their overall trading plan.
