Conventionally stocks have been considered the optimal investment opportunity for many of us, however the recent volatility and fluctuations made many investors look for the alternative – currency trading. Before leaping into the unknown territory, however, it is important to fully understand the differences between the two equally sophisticated and profitable prospects. What are the benefits of each? What are the major differences between the two? Why today so many stock traders are turning to forex?
Let’s consider the following essential differences between stock and forex markets:
When can you trade?
Stock market is limited to market hours. Once the market hours are over, you should close all of your transactions, otherwise you can get into trouble and lose the money the next day.
Forex market is rather flexible in terms of trading hours – you have almost 24 hours of opportunities from Sunday till Friday. This is achieved with the following market sessions:
|Region||City||Open (GMT)||Close (GMT)|
|Europe||London||8:00 am||5:00 pm|
|Frankfurt||7:00 am||4:00 pm|
|America||New York||1:00 pm||10:00 pm|
|Chicago||2:00 pm||11:00 pm|
|Asia||Tokyo||00:00 am||9:00 am|
|Hong Kong||1:00 am||10:00 am|
|Pacific||Sydney||10:00 pm||7:00 am|
|Wellington||10:00 pm||6:00 am|
Where do I get fast results aka profits?
Stock market can turn into a boring wait-out, that lasts days, months or even years! The prices can suddenly drop down and get stuck at the bottom for ages without any considerable changes.
Forex, on the other hand, is always on the move – there is a constant battle between the bears and the bulls. You will never experience any currency falling off the charts or reaching constant, sky-rocking heights.
Why does currency fluctuate anyway?
The exchange rates represent the worth of one currency compared to another. Whenever a currency value changes, the exchange rate varies accordingly.
The value of the currency becomes more valuable whenever the demand for it is larger than the available supply. Vice versa, whenever the demand is less than the abundant supply, the value of the currency goes down.
What triggers the changes in demand and supply? Any kind of alteration in business achievements, political uncertainty, central banks’ interest rates (Bank of England and USA Federal Reserve), gross domestic product and employment levels trigger the changes in supply and demand.
What are the trading requirements?
You cannot possibly enter a sell position without owning that particular stock. This means that you just have to buy the stock first in order to be able to do anything with it. There is no other way.
Forex is different in that sense, because you can enter sell position without buying anything first. That is indeed a wonderful characteristics, because this way it is only up to your decision whether or not you will make money today!
Is it difficult to analyze and forecast?
To be able to predict stock prices, you have to dig deep into financial reports and overall historical performance of the selected company. This is a very confusing and complicated task, especially for those who don’t have any economic background what so ever. In other words, without the minimum of bachelor degree in either accounting, economics or business administration, it is better to leave stocks alone. I mean, do you know how the structure of the company?
Can you, for example, evaluate:
2. Corporate action cash flow
3. Balance sheet
4. Profit and loss
5. Products offered
6. Products in the pipeline
7. Years in operation
8. Value stocks
9. Growth stocks
10. Emerging market stocks…. etc! Well, you got the picture!
Forex trading is not that complicated and you do not require having a degree in order to succeed. To analyze the market, you have to:
1. Learn the basics
2. Figure out technical and fundamental analysis
3. Have a full grasp of charts and indicators
4. Keep a trading journal (to learn from the mistakes you opt to make in the beginning)
5. Follow the news and economic calendar (this is available all around the net for free)
It is not a kinder garden and you will have to spend a substantial amount of time learning and practicing, however, if you do invest time and energy into this, within a year you can become a professional trader, even if you don’t have a fancy degree in marketing and economics!
How much money is needed to start in forex versus stock?
You need at least $2,000 in order to get into stock trading. Why? Because stock leverage is available when your account is at minimum of $2,000 and you may receive margin calls if the selected stock drops down a certain percentage of their value. Besides, margin requirements can be as high as 50% of your capital to take a position.
Forex fortunately for the novice traders have many deposit options starting from just $5! There are forex brokers, who provide mini accounts and even cent accounts – a great way to practice your trading skills before investing larger sums.
In forex the leverage ratio varies from 50:1 to 400:1. This means that with 400:1 ratio while depositing only $1,000 you can trade with $400,000. The overwhelming amount has to be traded wisely with very strict risk management rules. The higher the leverage, the bigger chance of getting into troubles without being extra careful.
What is riskier forex or stocks?
The risks in stock trading can turn your world upside down are company‘s debt, total bankruptcy or a violation of stock market rules (in this case, the stocks of that company are removed from the stock market). In other words, some companies fail without any kind of notice.
Forex is very risky too and can put your trading account in deep losses, however there are proven risk management techniques and trading plans that will keep you from making dreadful decisions. Moreover, the failure to profit it entirely up to you and not up to another person or company. You are the boss here and not just a by-stander.
And most importantly Major currencies will NOT FAIL!
Currencies are affected by 5 main things:
1. POLITICS – any kind of instability, changes, economic break downs or even a new government.
2. ECONOMIC FACTORS – deficits and surpluses, inflation/deflation, economic reports, interest rates, employment levels etc.
3. PSYCOLOGY – greed, fear, anticipation, overtrading (and yes, not only you are going through this!)
4. SPECULATION – high risk currencies investment with the anticipation of a price change can actually bring a negative impact on that country’s economy.
5. SUPPLY and DAMAND – currency’s Supply and Demand rates.
A full grasp of these 5 events and how they affect the currencies will open doors to everlasting, profitable forex trading career.