Forex vs. Stocks

Alright, so your lucky numbers came up and you finally hit the jackpot. Now, where should you invest? There are many options for you to consider, but let’s narrow it down to Forex or stocks. At first glance, you might think that this is a no brainer – everyone knows stocks are the better investment, right?

Stocks have come under quite a bit of scrutiny in recent years after the famous dotcom boom and bust of the late 90s. And more recently corporations have faced further regulations in the wake of the Enron-related scandals and the advent of Sarbanes-Oxley.

Forex trading is a relatively new investment vehicle which is catching steam and offers many distinct advantages over traditional stock trading. While you won’t see any shows on basic cable anytime soon called “Flip Your Forex”, you may be surprised how many investors are switching away from or supplementing their stock investments with currency trading.

Let’s take a look at the following comparative advantages that Forex offers over stocks.

Less is More

There are over 8,000 stocks listed on the NASDAQ (National Association of Securities Dealers Automated Quotations system) and NYSE (New York Stock Exchange) combined. How many major currency pairs are there? The general consensus for that answer is between 4 and 6. So, instead of constantly scouring article after article for hot stocks you can concentrate exclusively on just a few currency pairs.

This allows you to specialize in particular currency pairs with a much narrower focus. The stock market can often become overwhelming and it is extremely difficult to become an expert on each industry represented on a stock exchange such as NYSE or NASDAQ.

Leverage

Leverage is the ability for an investor to use various financial instruments (such as margin accounts) to increase the potential return on an investment. The maximum leverage for stocks is typically 2:1. Forex trading allows you to use much larger ratios of leverage (400:1 is not uncommon) with your investments.

Leverage is one of the most appealing factors of the Forex market; however, investors should note that trading using leverage may increase potential losses as well as profits on any given trade.

Always Open for Business

The major equity markets are typically open only during normal U.S. business hours. In contrast, the Forex market is open all day long. Most brokers are open from Sunday at 2PM EST until Friday at 4 PM EST and usually have customer service available anytime.

With Forex, you have the ability to trade during the U.S., Asian and European market hours. This allows you to create your own trading schedule – instead of being tied to the opening and closing bells of the New York Stock Exchange.

Bear or Bull – Who Cares!

No matter which way the currency market is moving, profit potential (and risk) exists in the Forex market. Unlike stock markets, Forex does not have any restrictions on short selling. Sounds too good to be true?

Currency trading involves the buying and selling of currency pairs and investors can buy either side of that pair. This means traders always have an equal potential to make (or lose) money – it doesn’t matter if the market is rising or falling.

Instant Trading

Are you tired of not getting what you pay for? With most online stock trades, the price that you think you’re getting is not what usually ends up on your order. In Forex, your trades are instantly executed under normal market conditions.

You can be almost certain the price you clicked is what you get. Most brokers will guarantee stop, limit, and entry orders. There’s no discrepancy between the price displayed and the execution price (unless extremely unusual market conditions exist).

Eliminate the Middleman

Forex markets do not have a centralized exchange location. All trades are executed directly with the institution selling currency. By eliminating the middlemen usually associated with stock trading in the currency market, Forex traders can have faster access with lower costs.

Commission Free Trading

Forex brokers usually do not charge any commissions or transaction fees to complete a currency trade. What?! That’s right – even if the trade is made online or over the phone. Brokers are typically compensated through the bid/ask prices and therefore do not need to charge a commission.

This spread is always fully transparent and you know exactly how much the broker is making – free of charge to you. This results in Forex trading costs which are lower than those of any other market.

Not Easily Influenced

Go turn on CNBC right now and listen – don’t worry we’ll wait. What did you hear? You probably heard recommendations by an analyst to buy such and such stock or to hold a particular stock, etc. The relationship between analysts, brokers, and investment houses is a tricky one. No matter how much government intervenes there are always going to be analysts that drive up the value of a particular IPO or brokers that receive higher commissions for selling a particular stock.

The size of the Forex market makes it very hard for a government, bank, or hedge fund to influence the value of a particular currency pair. The currency market is driven by global economic forces which are much harder to control and manipulate.

Additionally, how many people spend countless hours trying to find out what Warren Buffet’s Berkshire Hathaway is currently buying? Why does Warren keep it a secret? The answer is that the stock market is more easily influenced by large funds buying or selling of a particular stock.

The number of shares for a particular stock is relatively small when compared to the currency of a country. The incredible size of the Forex market insulates it from the power of large investors or funds to sway the market.

Which Reason Appeals to You?

We have listed several reasons why we think Forex trading offers an advantage over trading stocks. Hopefully some of these explanations will motivate you to look into currency trading.

Many investors supplement their stock holdings with positions in the Forex Market. Others decide to make a career out of Forex trading and forego stocks completely. No matter how you decide to incorporate currency trading into your portfolio, hopefully you now know how advantageous it can be.

Next: Basic Trading Math: Pips, Lots, and Leverage