Forex versus investing in stocks

If I’m not mistaken by now you should already have an impression of online forex trading. However comparatively few people know of online forex trading, but almost everyone is reasonably well informed about investing in stocks. In itself this is not that surprising, since until recently it has not been possible for private individuals to trade on the currency market.

Almost everybody knows about investing in stocks. Owning a stock certificate in fact means that you have bought a part of a company. When a company is doing well, the value of the share you bought will rise and consequently you’ll gain a profit.

In the article “What is online forex trading” I already indicated, that the value of a currency tells a lot about the economy of a country. When the economy goes well, the value of the currency will rise. For the imaging you could compare a currency with a share in an economy of a country.

Although there are a lot of comparisons between online forex trading and investing in stocks, there are also a number of very important differences. On your behalf we’ll make an inventory of the most important differences, so at the same time you’ll once more get a better view on the possibilities of online forex trading.

The liquidity on the currency market is a lot larger

This could well be the most underestimated issue. Each day currencies are being traded on the currency market for no less than 3 trillion dollars. When we look at shares and futures altogether, the trade amounts to about 600 billion dollars a day. You probably wouldn’t expect this at first sight while watching the economic news bulletins on TV. Most news bulletins are about the Stock Exchange and investing in shares, but actually the currency market is far and away the largest market.

This liquidity offers an important advantage. Whenever you want to place an order, you’ll always happen to find a potential trading partner right on the spot and as a consequence this order could be carried out right away. So, if you want to buy at a certain price, you don’t need to be afraid that you would have to wait till a potential trading partner might appear and that you would eventually be able to make a deal only after the price has become a lot higher.

Yet another big advantage of the liquidity on the currency market is that the prices cannot easily be manipulated. When it’s about shares, we know of enough scandals about people who used to buy shares based on having prior knowledge and based on manipulation. With online forex trading you have to own a huge capital to be able to manipulate the market. Even the big boys in the currency market most of the time and only in a few cases can cause nothing but a slight movement and in view of the increasingly growing liquidity, this is getting more difficult by the day. So in fact the currency market happens to be a lot “more honest”.

The currency market has not been centralized

In case of online forex trading there is no central place where the trade is taking place, since this is happening electronically between the banks themselves. They are also acting as intermediaries on behalf of the individual online forex trader.

As trading currencies is taking place all over the world, it’s a matter of a 24-hours market. This is caused by the time difference between the opening as well as closing hours of the different banks all over the world. For instance: when the banks in New York are closing, the banks in Sydney are already opening again. As from Sunday night it’s already possible to trade on the currency market and this will continue until Friday evening. With regard to the stock market on the other hand, it’s only possible to trade on working days between 8.30 and 17.00 hours.

As a physical trading location is out of the question, you can trade from any place whatsoever. The only thing you’ll need to have at your disposal is a telephone to pass on your order to the forex broker or a internet connection to enter your order through the online trading platform of your forex broker.

The transaction costs of forex trading are a lot lower

Particularly as a private individual you’ll comparatively have to pay high transaction costs as a commission to be able to trade stocks. It so happens that there are always fixed charges to be paid obligatory, regardless of the size of the amount for which you want to trade. This means that for the “ordinary” private individuals stock trading is considerably less interesting as it is for the wealthy people or authorities.

In case of online forex trading on the contrary you don’t have to pay commission to the forex broker, as you only are obliged to pay the difference between the bid price and the ask price, being the so-called spread. This spread is in proportion to the amount for which you trade, as a result of which online forex trading is also very attractive for the less wealthy people.

As with online forex trading the costs are in proportion to the amount with which is being traded, online forex trading consequently offers the possibility to trade with a much smaller starting capital. Basically you’ll be able to start online forex trading with no more than $100!

The leverage is a lot larger in case of online forex trading

Another reason why online forex trading is much more accessible for private persons, has to do with the leverage possibilities. On behalf of those who have no knowledge of leverage, I’ll first give an explanation of this concept. A 2:1 leverage means, that you’ll be able to trade with $100 for $200. In case of a 4:1 leverage, you’ll be able to trade with $100 for $400. In fact you’ll get more “buying power” at your disposal, at a result of which your profits (but on the other hand also your losses!) are going to be comparatively large in relation to the size of your account.

In case of shares a leverage of 2:1 and 4:1 is common, but with online forex trading some forex brokers even use to offer a leverage of 400:1. But I immediately insist to emphasize, that it definitely isn’t sensible to trade using a leverage as high as 400:1. It so happens that this is the other extreme, but nevertheless a high leverage itself could surely offer possibilities for the online forex trader.

With forex there are more possibilities to trade

Although in case of shares it’s possible to earn money if the price of a share is raising as well as if the price is declining, most investors only speculate on price increases. For this reason most investors only make a profit if the share prices are raising.

In case of online forex trading it doesn’t matter at all whether the prices are declining or raising. In case of forex trading it’s particularly about the trend of a price and it doesn’t matter whether the price is raising or declining. For this reason the currency market offers a lot more possibilities to trade.

In case of forex trading you should always concentrate on a limited number of currency pairs

In case of investing in shares the choice will not be easy if you’ll take about 400 liquid shares for granted. If you want to take optimal advantage of the available trading possibilities, you ought to keep an eye on quite a lot of shares as well as their ins and outs, while being busy investing in them.

In the currency market there actually are no more than seven currencies which are by far the most being traded. As in case of online forex trading the trade takes place in currency pairs instead of one-currency-values, we’ll eventually end up at a total of 28 currency pairs, which are frequently traded. However this does not mean that you’ll have to watch 28 currency pairs each and every day. Watching three or four currency pairs a day will often be sufficient for a lot of trade possibilities! I think I don’t have to explain the advantages of this procedure compared with a portfolio containing 400 shares….

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