Overview of stock trading
Stock trading involves the purchasing and selling of stock shares for the purpose of financial gain. As there is no real “trading” involved such as what you would experience with baseball cards or sports memorabilia, the terminology “stock trading” is a misnomer. In the financial and investment world, stock trading refers to the buying and selling of shares of stocks, nothing more.
Overview of FOREX trading
FOREX trading refers to the purchase and sale of foreign currencies in the foreign exchange market also referred to as the FOREX or FX. This is a decentralized market that operates on an over-the-counter format of trading foreign currencies. The market also determines what the relative values these different currencies are while worldwide financial centers act as anchors for the trading of these currencies between currency purchasers and sellers on a 24-hour basis.
Advantages and disadvantages of stock trading
There are 3 primary advantages to stock trading which include the following:
- Better returns on investment – actively trading shares of stocks oftentimes produces more profitable results than purchasing and holding them
- Familiarity with big name companies – stocks which are the most commonly traded involve the more recognized companies such as Cisco, IBM, Microsoft, etc.
- Wide range of choices – there are literally thousands of different stocks listed in the different markets around the world and the prices of these stocks are constantly moving in one direction or another so you just need to find them
Naturally, where there are advantages, there are disadvantages to be aware of. These include:
- Costs involved – despite the fact that you can trade online without encountering the normal broker fees and commissions, this still adds to day-trading costs overall
- Leverage – the maximum leverage you can achieve in the stock markets is 4:1 meaning that you can trade $100,000 in shares with a $25,000 investment which is extremely low compared to FOREX or futures trading
- Uptick rules where short-selling is concerned – this basically means that you have to wait until the price of a stock begins to increase before you can consider short selling your shares
Advantages and disadvantages of FOREX trading
There are 4 advantages and 3 disadvantages to FOREX trading compared to other types of investing including:
- Ability for going short – there is no structural bias in the FOREX market which means that you can profit whether the market is falling or rising
- Leverage – you can leverage your investment up to 100:1 and generate a huge profit from a small investment
- Liquidity – trade executions are nearly instantaneous and involve little slippage
- Trends in the market – interest rates and the strength of a country’s economy determine currency values
Now for the disadvantages of trading in the FOREX market:
- Brokers – you have to use a broker meaning that there will be commissions and fees to pay
- Leverage – high leverage ratios oftentimes equate to huge risk
- Spread – since you have to employ the services of a broker, you cannot trade at interbank rates
3 thoughts on “Stocks versus FOREX Trading”
its really a useful education material for new learner.New trader can clarify where he/she wants to spend their money.
But i want to ask a question you have just differentiate stocks versus forex trading,advanteges and disadvantages.
what you think is the best way to make money??
I’m afraid your questions too generic. Can you be more specific? Do you mean to ask whether I think it’s best to make money with stocks or forex?
I hope I’m not being paranoid is thinking that you may have asked this generic question to get your forex link in the comment.
Please tell me this is not the case.
@usha – you did asked a to generic question indeed!
there is no best way to make money, there is the way that works best for each individual trader/investor!
should you fancy trading stock, bear in mind that there will be a lot of Annual Reports to read, if you wish to be a Value Trader, or, you have a lot of Technical Analysis to learn, indicators etc, should you wish to be a more technical trader!
For the forex market will be the same, but the advantage over stocks here is that you can have more leverage with a smaller deposit! but bear in mind, that this will bring with it more risk!
my advice for you, is to test both and see which one will be more suitable for you! but don’t go out there and plunge your money in stock or FX, learn first, then make a decision!
you should be able to tell which one you prefer after a mere trial!
to your success,
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