Nowadays, Foreign Exchange markets (Forex) and stock markets are becoming a more popular investment game. Everyday, transaction value for each of them can sum up to trillion of dollars. Although both can be classified as a form of investment, but the investment concepts are not similar. Some people will prefer to invest money into both markets as to balance the risk between the markets.
I have laid out the key differences below between the two investment markets in order to let you have a more thorough and better understanding about the games and can then decide on which one suit you best: -
i. Average investment duration
Generally, Forex market is more suitable for investors who like short term transaction. Most individual forex traders trade on a day trade basis. Day trade basis simply means entering and exiting into the FX market on the same day. Individual investors usually earn small daily earnings which can range from 10 to 30 pips. But for professional FX traders, they usually will opt to partially automate their day trade process by using their personal transaction system.
On the other hand, stock market is deemed more suitable for investors who would prefer mid to long term transactions. Although there are still some investors who are practicing day trade basis, most investors would prefer to invest their capital in longer period, which takes up to weeks or even years. After the maturity period, they will harvest on the profit in a whole lump sum.
ii. Market trend factors
Forex market is not affected by market trend as Forex trading is done in pairs. Forex-pair deal means profit and loss is totally determined by difference of forex rate. For example, if you invest your capital base of Euros to Dollars at FX rate at 1.1999 at initial stage, then you call of your deal of FX rate of 1.2222. This will bring profit of USD23 if your initial investment capital is 1,000 Euros. From the example above,, it is clearly proven that FX market will only be affected by its relative value compared to other currency and will not be affected by changes of profits in the market.
As for stock market, it is greatly affected by market trends and this is why stock market investors foresee to have difficulties in short term dealings.
iii. Leveraging your money
Stock market disallows you to own great purchasing power. The maximum trade margin which it can offer is only 2:1. If you have $1,000, you can only purchase the maximum stock value of $2,000.
For FX market, it can give you a huge range of trade margin of 50, 100, 150 and 200:1. If you have $1,000, you can purchase a value of $150,000 using trade margin of 150:1. This gives you the flexibility to control large amount of capital with small on-hand capital.
iv. Trading with low capital account in FX market
Stock market always has a limitation, specifically for small investors. Most stock brokerages do not offer your flexibility to purchase in odd lots, but only in blocks of 100 shares each as the minimum purchase. In stock market, most stocks valued from $15 to $500, so if you intend to purchase any of them, your initial capital have to be estimated from $1,500 to $50,000 or even more.
For FX market, it allows you to invest even as little as $300 and provide mini contracts facility which allows small investors to deposit money for investment. This brings a lot of excitement to amateur as smaller start up capital brings less risk as well as gaining more experience through it.
v. Less hesitation for account considerations
Sometimes, we will feel very frustrated when choosing which stock to buy as there are thousands of companies listed in the market. We need to spend plenty of time to study which stock has the potential of bringing profitability to us. However, for FX market, you may achieve the same results by investing shorter time to evaluate. You just need to study the country's major news and directions. Normally, developed countries tend to have more stable currency standings.
vi. Decentralized market structure
Basically, stock market requires a centralized market to execute all transactions, e.g. NYSE. All stock trading limits the buyers and sellers to trade at centralized market.
For FX market, the transaction can be done via different brokerage agents or dealers. This will bring competition to FX firms as traders now have more options to choose from and decide on the party that can offer the best deal.
After reading these, you should have a clearer picture about the difference between FX market and stock market. You are advised to engage in FX market or stock market only if you have fully understand the risk involved, and is willing and prepared to allocate the appropriate funds, which are not essential or vital for your well being.
Final piece of advice Wonder what differs between the losing 70% and the winning 30%? Forex trading skills and the trading system! If you wish success in Forex market, be very sure that the road is long and you need to study hard and smart to learn what it takes. The Forex market is definitely not a game for newbie and you need to brush up your skills before getting your hands wet. Article by Teddy Low. |
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