Forex vs. Stocks – It’s not a matter of which is better as far as an investment is concerned.
When it comes to Forex and the Stock Market, they are two different worlds to retail traders and investors. Both markets operate very differently, but they are both worthy of investment as long as the investor has the right expectations and risk management. Unfortunately, one market is treated with greater maturity on the retail end than the other. Individuals under the age of 40 should have some risk in their investment portfolio and they should have asset diversification. There is room for both trading currencies on the Forex market and stocks on the various stock exchanges, it is just a matter of proper allocation and understanding.
Where it goes wrong
It’s a matter of treatment when it comes to juxtaposing stock holdings and currency pair holdings. Equities (stock holdings) are part of investors’ portfolios with fixed income securities (bonds and notes), these portfolios are meticulously managed by advisors, portfolio managers and individual investors with great care. These investments are for the purposes of retirement income and with the insecurity of socialized pensions due to fiscal instability, inflation and a significant decline in birth rates there is a great deal of seriousness.
Forex has the greatest trading volume market, but it gets the casino treatment by retail traders and brokers. The inherent differences between the Forex and the Equities Markets make it obvious why retail Forex gets a bad reputation. It is a reputation that could easily be mended, if participants want to do so.
Cost of Entry into the Forex Market vs. Stock Market
In the Forex Market, a lot is 100,000 units of a currency pair. In the case of the most traded currency pair, EUR/USD, it is $100,000 USD. Most traders do not have their hands on $100,000 USD to trade, which means that the market would be theoretically be restricted to institutional traders (banks and hedge funds) and wealthy investors/traders. Overcoming this barrier of entry is one of the inherent issues regarding Forex.
Individual retail investors with equities and fixed income portfolios are well-capitalized, but in Forex almost all of the retail participants are not because of this high bar to clear. The good news for retail Forex participants is that fractional lot holdings can be combined with other orders due to the market’s typically high liquidity.
The lack of capitalization necessitates margin trading
Leverage provides retail Forex investors/traders with the ability to trade as much as 2000 times their investment, which is a completely reckless practice on the part of the broker and the trader/investor. Leverage is a double edged sword that makes it easier for participants to turn a large loss or a profit.
Margin trading in the stock market is rather low in terms of the leverage because most participants can buy a share with their cash investment.
The ability to trade fractional lots opens doors
The ability to trade fractional lots is both a blessing and a curse in Forex. Trading fractional shares in equities is not typically possible except in the cases of rights offerings, stock splits, dividend reinvestment and other corporate actions. Since the share prices are relatively low, equities do not need to be fractionally purchased for the purposes of creating a portfolio.
However, when it comes to Forex, it is rather necessary to have fractional lots to trade. This makes it easy to create a create a portfolio or to have positions that fully hedge.
The positives of fractional lots, which enable investors to create responsible, yet leveraged portfolios are clear as the barriers to entry are lower. However, these same barriers to entry being removed by fractional lots also enable the casino attitude where traders come in and treat a currency pair like it is a game of Roulette. Red or Black, Even or Odd, Buy or Sell. However, it is even worse than Roulette because the vast majority of traders trade without stop loss and take profit levels. At least a game of Roulette has a fixed amount that could be lost or gained, but a trading loss could result in a Margin Call.
Smaller positions that comprise “micro” accounts enable those that wish to trade $500 or less and give them the hope that they can make instant profits that will become lucrative and life-changing. Unfortunately, trading is a grind and expectations are unrealistic. Small accounts with high leverage eventually result in losses.
How Stocks are Traded and How Currency Pairs are Traded on the Retail Level
Stocks are traded in a portfolio, no investor is placing 100% of their account into one stock. Portfolios encompass a diversified and hedged compilation of stocks that offer dividends and growth potential. There is a level of patience with the stock market as the investor is not investing on margin.
Currency pairs are often traded one at a time as the retail trader seeks to trade the entire deposit (notice the language choice here) and get the most lots at the highest leverage available in the pursuit of the largest possible return. Whether the trader seeks to place a stop loss or take profit point is unknown, but these are more frequent in Forex than in equity trading because of these factors:
- Leverage creating less margin of error on a trade.
- Markets can be very choppy.
- Trades are made on a 24/5 basis and it is tougher to maintain surveillance.
- Rollover Swap payments (when they are paid by the trader) can be discouraging.
Information Gaps
The majority of retail Forex traders are punters, but not all retail Forex traders are unprofitable or even undisciplined. There are a good number of retail Forex traders that make a great living or side income trading the markets either manually or algorithmically. These traders know when market events will take place that could impact their trading habits and adjust according to their respective strategies. Economic reports, foreign policy, elections and central banking decisions or rhetoric (jawboning) can move currency pair values. The findings in these reports from the central banks and economic data are often quite dense, but they can be summed up in a metric figure or two at times. This data is not as readily available and there are varying degrees of importance to each report, which means that some data matters more than others. The market can quickly forget about Manufacturing PMI figures or not even take them into account, but CPI, trade balances or central bank interest rate decisions are not to be forgotten.
When it comes to stocks, there are different things that impact how people place trades. There are investors that seek growth and value. There are investors that invest because they believe that the company is righteous or that they just like the company. The financials of a publicly traded company are readily available and the ratios are easy to come by with a simple Google search.
When it comes to Forex vs. Stocks, it is not a choice and one market is not better to invest in than the other. They both need to be treated with care and responsibility, but they are different markets and investors need to be aware of this before getting involved.
The post Forex vs. Stocks – Which is better to invest in? appeared first on freevestor.
