Anyone wishing to invest has to choose from an almost limitless numbers of platforms, vehicles, assets and methods.
At times this choice can seem overwhelming, particularly if you’re taking your first steps into the world of investing and working on getting to grips with concepts such as going short or long, contracts for difference and arbitrage. The best route to take is to simplify matters by distilling your choices down to a few basic either/or options, and perhaps the most basic of all is whether to invest in traditional investments such as blue chip shares, or dip your toes into the exciting world of forex trading.
Traditionally, investing in shares has been the choice of those looking for longer term returns in the form of dividends. This makes shares of this kind the ideal choice for those investors who want to make an investment and then simply sit on it until and unless a radical change occurs. If you’re looking at investment as a dynamic activity however, and one which offers the chance to devise strategies aimed at delivering strong returns, then forex trading represents the smarter choice for a range of reasons, and those listed below are just ten of the best against traditional investments:
Leverage is a means via which a trader can multiply the amount they can invest in an asset, without increasing the actual amount of capital they have to put forward. In simple terms it offers a multiplication of the amount of capital a trader puts down, with the balance taking the form of a loan from the broker. For example, if a broker is offering leverage of 50:1 on an asset, and the trader invests £20, they will be able to buy £1,000 worth of the asset. This greatly increases the potential profits to be made without involving a larger initial investment. Trading in stocks means that traders can only access maximum leverage of 2:1, whereas forex offers leverage sometimes reaching as high as 500:1, although it should be noted that leverage also increases the chance of big losses.
Choosing which stocks to buy involves having sufficient knowledge of the company in question to be convinced that the share price will rise in the future, and very little else. Investing in forex, instead of traditional investments, means having a clear opinion on what is going to happen to the economy – and therefore the currency – in at least two countries simultaneously. For those attracted by the idea of applying their analytical skills to the pursuit of profit, this kind of analysis of a set of metrics which are constantly shifting against a political and macro-economic backdrop, is a huge part of the appeal of forex investments.
There are literally thousands of stocks to choose from, and, as outlined above, making that choice on traditional investments generally involves taking a long term position. When it comes to trading forex, on the other hand, the vast majority of trades take place between pairs of major currencies such as EUR/USD and USD/GBP. There are only eight major currencies, and even if you look slightly further afield to lesser known currencies, there are still only relatively small numbers to choose between, as opposed to attempting to zero in on the right choice of stocks from the many thousands on offer. The narrowness of choice when it comes to currency pairs makes it easier to concentrate, instead, on monitoring market conditions.
The sheer size of the forex markets dwarfs the volume of trades taking place on the world’s stock exchanges. Whereas the average daily volume of trades on forex is $5 trillion, the same figure for all of the world’s stock exchanges is just $200 billion. This high volume leads to higher liquidity, as the massive amounts of investment moving through the system constantly make it easier to enter and stop positions at speed, something which is vital to making the most of even the slightest shift in the relative strength of currencies.
Put simply, if you want to invest in currency you can do so around the clock. The forex markets are open 24 hours a day which is vitally important for retail traders who may be working on investments around ‘day jobs’ or other responsibilities. This means that you can monitor any shifts in the markets that take place and adjust your positions to take advantage of these shifts no matter what time it is. Stock exchanges, on the other hand, tend to open and close in a more traditional ‘working day’ manner, and although ‘after hours’ markets are available, they are not the ideal choice for retail investors.
Up or down
Whether you think a currency is going to rise or fall makes absolutely no difference to the ease with which you can take a position to profit from that shift. Whether purchasing pairs of currencies or contracts for difference (CFDs) you can zero in on any currency movement and use it to your advantage. Short selling stocks, on the other hand, is something which requires much more technical skill, so making profits from a declining stock market is a highly specialised art, whereas trading on declines in forex is part and parcel of everyday investing.
The forex market offers a degree of volatility which is highly attractive to traders looking to take an aggressive stance and move quickly in and out of positions to build profits. Stock markets, on the other hand, tend to be more stable – sudden era defining crashes such as happened in 2008 notwithstanding – encouraging long term investment but making daily profits unlikely.
This one is simple, in that the commission you pay to a broker when dealing stocks is generally much higher than the commission you have to pay to a forex broker. Traditional brokers tend to charge commission fees as well as fees owed to the exchange. Since every fee charged cuts into your profit, forex trading keeps more of the money created by your investments protected.
Although recent shifts such as the new European regulations introduced by ESMA (the European Securities Markets Authority) have tightened up the regulatory regime surrounding forex trades, the market in general is still much less tightly regulated than the major stock exchanges. The vast majority of regulations that do apply have little impact on the activity of retail traders, being put in place to offer protection rather than limitations.
Level playing field
Although insider trading is against the law, the average retail trader has to accept the fact that they aren’t as well informed regarding the strengths of a particular business than those who work in the industry or know the business well. The global currency markets, on the other hand, and the factors which might impact on them, are equally accessible to every retail trader who takes the time to follow the news, analyse the figures and study the historical record.
Ultimately, the choice of whether to invest in forex or more traditional investments is a matter of personal choice. Do you want to create quicker profits? Are you willing to handle risk and act quickly to close down losing positions or take the profit on winning ones? Do you want the ability to trade around the clock? For the reasons listed above, we feel that forex trading offers the more appealing, exciting and accessible option.