Daily Forex #7 - Why Forex Trading Is Better Than Stocks
Today, investors and active traders have more choices and access to a growing number of trading instruments, from stocks and options, to the faster paced futures and forex markets. Even more recently, cryptocurrency trading seems to be the shiny new object of the trading world.
The more popular choices among traders are still stocks and forex and today I will be comparing both of them. The major difference between these two markets is the number of trading alternatives available. The forex market has very few compared to the thousands found in the stock market. The majority of forex traders focus on seven different currency pairs.
They are the USD against the other 7 major currencies :
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF
- USD/CAD
- AUD/USD
- NZD/USD
All the other pairs are just different combinations of the 7 major currencies, better known as cross currencies. For example EUR/JPY or AUD/CAD. This makes forex trading easier to follow because rather than having to pick between 10,000 stocks to find the best value, the only thing forex traders need to do is follow the economic and political news of these eight countries.
Another advantage of the forex market the the huge daily trading volume of US$5 trillion. Due to the high liquidity of the forex market, margins are low and leverage is high. It is not possible to find such low margin rates in the stock market. Most margin traders in the stock market need at least half of the value of their investment available in their margin accounts, whereas forex traders need as little as 1%. This means that if a stock trader wants to buy $100,000 worth of stocks, he needs at least $50,000 in his margin account. Whereas a forex trader only requires $1000. Furthermore, commissions in the stock market tend to be much, much higher than in the forex market. Traditional stock brokers ask for commission fees on top of their spreads, plus the fees that have to be paid to the exchange. Spot forex brokers take only the spread as their fee for each trade.
All the above just makes the forex market much more attractive compared to the stock market.
Daily Forex is my way of sharing my personal thoughts on the Forex Industry with would-be traders as well as current traders.
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Here are some interesting topics to start you off :
- Daily Forex #1 - Will Forex Trading Be Banned
- Daily Forex #5 - How Forex Spreads Work
- Daily Forex #6 - What Makes The Price Move
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You should consider youself lucky, very soon we're having the new European Securities and Markets Authority rules forced upon us which means the vast majority of retail traders won't be able to trade any more.
All the margin rates are increasing by a factor of about 10, for example equities are going to have a margin of 20%, commodites 10% (instead of the 0.5% or less they have now).
I know they're only doing it to try protect people, but it just means that virtually no-one will be able to start out with a small account, especially new traders.
I'm lucky because I qualify as a 'professional trader' under the FCA rules so it doesn't affect me. I expect everyone will just move to foreign brokers instead to get round the rules. If I find I can't get fills anymore because no customers means no liquidity, I'll be moving too.
I'm skeptical of rules like this that are "to protect the people from themselves," it's too effective of a cover for rules meant to keep poor people from becoming wealthy. Too much cognitive dissonance from the fact that margin trading has severe restrictions on it (in the US) but you're welcome to go to a casino if you want to gamble.
I think you're right. It's being sold on the 'protection' thing but really it's just a way to make people lose more money faster. Up till now new traders only needed a couple hundred dollars to open a trading account (and lose it) but now they'll have to open a $20,000 account and lose that instead.
We already had the same nonsense with cigarette packs. You used to be able to buy 10 packs or 20 packs, but now 10 packs are illegal. The supposed reason was to stop children buying 10 packs because they couldn't afford 20's (!!!!). But of course, it just means everyone has to buy 20 when they only want 10, so the manufacturers profit from the increased sales and also save money by only producing one pack size.
What
s better forex or stock market - its impossible to say unequivocally, you have to focus on what you prefer, because these markets have different fundamental principles of investment, as well as the trading process itself. But for me I chose Forex. Generally, when I was reflecting on which road better to choose, I read a lot of literature, found many useful books, includingForex books download. They made me understand lots of principles and differences. Personally, I'm always in favor of learning and in any field. Forex is in many ways more accessible and easy for even a person with 100 bucks to understand what stock trading and the market is.It's hard to discuss advantages before understanding the difference between forex and stocks. Stocks represent a share of a company (business) whereas currencies represent buying power. When people buy shares they invest money whereas currency buyers just hedge themselves against a weaker currency and don't expect any profit.
I agree that trading foreign currency is way more profitable than stocks. I used to work with them at first, but I'm really glad I decided to try trading forex on https://www.fxstreetlive.com/. This market is way more accessible, and I think it's easier to work with foreign currency. But that probably depends on a person.