Introduction – Why Trade Forex?
Basically, there are two types of investors in the world. There are investors who primarily like to invest in foreign exchange market and then there are people who would rather prefer the stock market. If you search online, there has been a never-ending debate between the advantages and disadvantages of both these trading markets. The fact of the matter is that both are popular trading markets and hundreds of millions of people take part in both these market activities worldwide. At the same time, however, foreign exchange trade is usually considered to be more profitable by many investors. There are various reasons behind this claim and some of the important points are discussed below.
Forex trading is undoubtedly a highly profitable option. One of the core reasons lies in the simplicity of foreign exchange trading. In the stock market, traders can have many hundreds and even thousands of options to choose from. Presence of thousands of options makes decision-making slower and technical analysis more difficult.
On the other hand, there are only a handful small number of currency pairs to choose in Forex, such as EUR/USD or GBP/USD. All the currency pairs are in fact combinations of basic 7 currency pairs. Hence, any developments may be easier to follow and analysis becomes sound which ultimately leads to better decision making.
Round the Clock
Secondly, round the clock trading practice makes Forex trading more attractive trading market. Forex markets operate 24 hours and this is one of the most important and well-known advantage of this market. The fact is often deemed unimportant or neglected by the supporters of stock market. In reality, however, it can have huge potential implications for Forex investors. With the exception of weekends, there is no gap between the actual events taking place and their information being spread.
A devoted Forex trader would quickly know about the latest happenings and he or she can make better informed and more-timely decisions. This means reduction of risk and more profits by better decision making and minimizing risks.
On the other hand, less working hours in stock market may delay the decisions and the opportunity to exploit any latest information may be lost. Therefore, stock market can be riskier without providing any additional profitable benefit.
High Costs in Stock Market
It is one of the simplest rules of any business that high costs reduce profit. This factor is often neglected in the discussion of Forex VS Stock trading; however it can be a very crucial factor. The overall cost of trading in stock market includes commission of stock brokers, their spread and fees paid to the stock exchange. On the other hand, the only cost is in Forex market is the spread paid to broker as their fees. A detailed comparison of these costs would show that even if stock trading becomes profitable at some point, the overall cost is likely to considerably reduce the extra profit. Whereas no huge cost involved in Forex trading, hence improving the overall profit.
Leverage is another important concept in context of both Forex and stock trading. There is a huge difference between the leverages in both these trading. The leverage is usually much higher in Forex trading if compared with stock trading. Leverage of 2:1 provided in the stock market is much less than the leverage of 100:1 provided in the Forex market.
These are usually the common leverages and may vary in different situations but Forex will also provide higher leverage. While it may not be directly related to profit maximization, it is still considered as an important advantage of foreign exchange trading.
Level of Risk Involved
Stock trading is obviously more risky than foreign currency trading. Price fluctuations are very minimal in currency rates and while it reduces the margin per unit of currency, it also reduces the risk of potential loss. Investors can easily increase their profit by buying large quantities of currency stocks. On the other hand, stock market is prone to rapid change in prices and huge fluctuations. Such fluctuations can result in huge losses. While there is also an opportunity to earn substantial profits, it is very rare in reality. Only the most educated investors with better luck along with appropriate technical analysis and calculated decision-making are usually able to take advantage of such favorable events.
Above were some of the important points which make Forex an attractive trading market for worldwide traders and investors. Trading is foreign exchange market is simpler, less costly, highly flexible and less risky. A huge portion of experts, commentators and investors also believe Forex to be better profitable due to these (and few other) obvious reasons.
However, the choice of either of these trading options can depend on personal preferences, individual circumstances and risk appetite.