There are so many ways to invest your hard earned money that it can be quite confusing. You can invest in Stocks, Crypto-currencies, Foreign Currencies, etc. One of the problems in trying to sort out which way to go is that not everybody can agree on what the best one is. There are a lot of factors that go into investing that make one system better for a particular person that might not be best for the next investor.
It pays to take a head to head look at two different investing strategies and see how they match up. Not necessarily to say which one is better, however. It’s an exercise that is meant to give some food for thought so you can make an informed decision.
With that in mind, we will take a look at Forex trading and buying stocks to see which one looks most appealing to you.
What is stock trading? Why Invest in Stock?
Buying a stock is simply purchasing a share in a company. Which in itself has a lot of different ways to go about things. You can buy any number of available stocks in a company that you’ve chosen, or you can buy an ETF in whatever amount you want. These are Exchange Traded Funds so you are buying portions of shares in many different companies to offset some of the risk.
When you buy a stock in a particular company you will share in the profits either by selling the stock for a higher amount than you paid, or in the form of dividends that come in regular as the value of the shares you bought increase.
There are a couple of ways that people like to do this. Some keep a close eye on the market and sell as soon as they feel that the value has peaked while others would rather hold onto the stock and collect the dividends over time.
The best dividend stocks are good earners that give you a decent return on investment on a regular basis so if you are interested in long term investing then pay close attention to which ones are performing consistently over the long term.
When you want to just make money now without waiting then trading stocks is the answer. There are two types that you can be. One is an active trader in which you are regularly monitoring the market and your stocks and deciding on the best time to buy or sell. This could be over weeks or even months depending on what your strategy is and what the market looks like.
Then there are day traders who buy stocks and then sell them sometimes within hours of buying them. Their aim is to make a daily profit by taking advantage of the slim margins when there is an increase in value.
What is Forex trading?
Forex trading is simply buying and selling foreign currency. It’s essentially shorthand for Foreign Exchange. This is interesting to many investors as there is always an ever changing exchange rate between currencies.
These traders like to buy up a currency for as cheap as possible and then exchange it for another one that will give them a good return.
It seems very straightforward and much easier than picking winners in the stock market. However, the forces that govern the value of a particular currency are very complex so you have to really understand the intricacies of the global currency exchange.
Even though on the face it looks a lot different than stock trading, there are some ways that it is similar. The buy low and sell high mantra applies just as well to forex trading.
Many traders are looking for short term trades as long term is too risky. There is very little motivation to hold onto currency for a long term unless you lose money and want to wait for a rebound before trading it. It is similar to the active trader who deals with short term stock trading.
What are the differences?
One of the biggest differences in trading is leverage. Leverage is simply a loan so you can trade above what your capital is. Both systems use it, but it is essential for a forex trader. The reason is that there is hardly any fluctuation in the value of a currency in the short term. It is fractions of pennies. Meaning that you would need hundreds of thousands of dollars to make any money trading currencies.
Rather than expecting people to have that kind of cash, brokers will offer leverage of around 100 to 1. This means that if you want to trade up to $100,000 to buy foreign currency, you will usually only need $1,000 in your account.
With stocks, leverage works the same way, but the ratio is far lower. You can expect only around a 2 to 1 ratio with a broker. There is less of a reason for a trader to need to borrow a lot as there is a lot more movement with stock values over the short term.
The other big difference is that there are no market hours when it comes to currency trading. If you are buying stocks of listed companies on the NYSE, then your trading day is over at 4pm EST. This helps you recover from a sliding stock so you don’t end up losing a fortune when you aren’t aware.
Since there is no off time for forex trading, you could be losing money while you sleep and not realize until you wake up and the damage is done.
The market size is also a lot bigger due to the global nature of foreign exchanges. The stock market is only as big as the trading exchange with companies listed on it. The foreign exchange is much larger as it spans the entire globe. An average day of forex trading will see trades in the trillions of dollars. The entire NYSE sees less than $200 billion per day. This could lead to a lot of advantages when it comes to trading currencies.