Stocks versus FOREX Trading

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