Differences Between Forex Trading and Stock TradingDaffa Zaky
The entirety of the financial instruments and markets that drives the economy today. Understanding all of them is an incredibly difficult task. According to many of the experts, no amount of the effort can give you a complete comprehension.
Luckily for you, to invest your money in the markets and expand your hard earned portfolio, you do not need a complete understanding of all of the complex tools. All you need is a basic understanding of how the market works, what the tools are and the major things to lookout for when investing. The most important aspects of investing are to be aware of the changes and only take on the risks you can afford to lose. In many of the cases that we have seen people losing their life savings is either they did not have even the basic idea about the financial web they were becoming part of or that they thought they had a much better understanding then they actually did and took risks that they could not afford to. Thus we give you a basic introduction of two of the main types of investment vehicles, forex and stocks and how you can decide between the two.
Forex and stocks: what they are
Forex trading market is the global market to trade between currencies. It is not usually controlled by any nation or institutions and are largely products of supply and demand of the market. Annually, trillions of dollars, euro and pesos are traded between traders. The levels of currencies are usually set by the supply and demands of the currencies which in turn are set by the economic realities in their respective countries. This is largely a market of speculation where investors buy a certain currency when they feel the currency is undervalued or that they predict the economy in the country is going to get better and its value is going to rise.
Stocks on the other hand are investment markets. At its core business owners raise money from the general public by offering the public ownership of the part of the company. The unit of ownership is known as a stock. Traders buy stock if they feel the value of the company is going to rise up and sell them if they think it is going to go down. However, this is a very big oversimplification of how the advanced stock markets work today. As a general pubic you can have access to the stock exchanges through professional traders. These traders used to trade stock on physical locations, however, today most of the trading is done through very fast computers. In many cases, even the general public are allowed to trade on some of the exchanges directly through the internet.
Which one to pick
Now we can discuss how you can pick between the two kinds of investments. It is important to consider all of the factors before investing your money.
This is the measure of how often the prices in the market change. Many of the individual traders who trade from home prefer to have high volatility as they can make profits in the margins of even the smallest changes of their portfolio. On the other hand, other people might prefer stability in their investments.
If you prefer to take the risk of a volatile market than the currency market is very much suited for you. Here prices change by the second and the rules are easy to understand. Some, smart and aware investment can ensure that you make money every day.
Alternatively, blue color stocks of large companies are thought to be as more stable. For people who prefer passive investment this is preferable. One advantage is that over the long term these usually have an upward trend and every profitable year you get bonus shares or dividends from most companies. This takes little of your time and gives you a stable income.
Leverage is the measure of debt in the investment. By definition the higher scales of debt are considered to be riskier. Generally, forex markets operate at about 50 to 1 leverage whereas stock markets do not see leverage above 2 to 1. The main advantage of leverage is that this helps people build large portfolios from very small equity investments. For instance, some forex accounts can start for as little as $50. The point of concern with playing with high leverage is that if you have a bad day or a bad week your entire portfolio can be quickly eviscerated.
As we have mentioned before, investment vehicles can be very complicated. You also need to have a wide knowledge to master all of these vehicles. For most everyday investors, this is not possible. Thus simplicity can also be a very important parameter on deciding where to invest.
In this regard the forex market is considered to be simpler investment. Here, the rules of supply and demand are fairly simple and straight forward and you can cover more than seventy percent of the market by following only the top 8 combinations of currencies. On the other hand, the stock exchanges are incredibly complicated. It is divided into several categories, each with numerous companies. The New York stock exchange alone has 2000 listings. The technical jargon and the specification here are also a lot more complicated.
Market and volume growth.
This trend measures the popularity and the magnitude of each of the market. This parameter is not very important but useful for everyday investors. A larger market and a faster growing market usually signify a larger potential for growth.
Over the last 15 years, forex has seen a clear increase in its magnitude of the volume traded. On the other hand, the volume of the stocks traded in public companies has fluctuated. Today the stock market is about 1000 times smaller than the forex market.
This article has been a basic introduction to the various parameters that you should consider. It is important to educate yourself financially before investing. As parting words, we also recommend you to only deal with trusted brokers and people. Unfortunately, there is a large contingent out there of get quick rich scams.