Forex trading holds significant differences to stocks trading. Understanding these differences will aid a trader in deciding the right market to enter. Forex trading itself has several advantages over stocks trading and is ideal for the beginner and individual small investors.
1. Low Transaction Costs for Forex Trading. There are no hidden fees for forex brokers as they are not paid by the traditional commission based fees. The fee paid to the forex broker is calculated directly from the trade in the form of the bid ask spread. In forex trading, the spread is the difference in how much you pay for a currency and how much you sell it for. This spread is commonly expressed in "pips" or points.
2. Forex Trading is a 24 Hour Market. Forex trading can be done anytime of the day, the forex market is open for business twenty-four hours a day. This is considered a huge advantage for individual small investors who are just starting out forex trading in their spare time. This allows forex traders to juggle their schedule around their trading opportunities; they can schedule their forex trading when it is convenient for them.
For those of you who are night owls and prefer to trade at 1am, then forex trading is just right for you. Depending on where you stay, there are banks opposite the globe open for you to trade.
3. Fast Trade Execution and High Liquidity in Forex Trading Trading forex means that you are trading in cash. No other form of investment has more liquidity than cash and as such, trades are executed almost instantly. There is no lag time in forex trading.
4. Having Leverage and Margin in Forex Trading One of the significant advantages that forex traders have is the ability to trade on margin. This gives them a huge leverage in their trading and presents the potential for extraordinary profits with relative small investments. Let's take for example; with a forex broker that allows a margin of 100:1, you can buy $100,000 in currency with only a small $1,000 deposit. A word of caution for the uninitiated, leverage can go both ways and may lead to large losses if you are not careful.
5. Forex Trading Requires Only a Small Sample to Study. Stocks trading present thousands upon thousands of stocks to trade. Small and large companies, international companies, newly issued IPOs etc. It is highly impossible to follow them all.
Forex trading, on the other hand, presents only seven major currencies to follow so that you can devote more time to each of them. Many successful forex traders do not even trade in all seven major currencies; they just choose three or four and master them to achieve success in forex trading.
6. No Bear Markets in Forex Trading. In forex trading, since you can trade either short or long, you will be able to make money whether the prices go up or down, that is if your predictions are accurate of course.
7. Forex Market is Not Easily Influenced. The forex market is so amazingly huge that no one individual, bank, fund or government body can influence it for a long period of time. Forex trading is the opposite of stocks trading where one negative television appraisal of a company's stock could possibly send it into a tailspin.
Based on the above advantages, forex trading is a clear winner for the beginner and individual small investors. If you are deciding on a form of trading to enter and master, then forex trading is the choice for you.
by Duncan Lee
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