So you’ve decided to start actively trading, because financial safety is for pussies. Congratulations! Trading is a win-win scenario. If you make money, you can become a politician and accuse poor people of not trying hard enough. If you lose money, you can provide charity workers with a sense of purpose for years to come. Protip: one of those wins is better than the other. Pick the right market to trade in:
Trading Forex and Trading Stocks
Foreign exchange (Forex) is based on the trading of currencies between different countries. Forex rates are affected by crises and booms in national economies, and by the actions of the various countries’ central banks.
Stocks are shares in companies, with prices based on the company’s performance and perceived value.
In both cases, active traders follow the same principle: they want to buy a currency pair or stock when the price is low, and sell it for a profit when the price rises. However, Forex and stocks differ in a few key areas:
- Trading Times
There are several thousand listed companies you can buy stocks in. And to make an informed decision, you’re going to have to look through those companies’ balance sheets, past year performances, P/E ratios, and CEO’s excuses.
Also, every one of those financial reports is so dry and technical that most people need to chew live electrical cables to stay awake reading them. Even if you intend to skim them, or are experienced enough to process them at a glance, more options = greater chance of mistakes.
Forex, however, just has 18 currency pairs. Of these, you mainly stick to four:
- EUR / USD
- USD / JPY
- GBP / USD
- USD / CHF
Mind you, that doesn’t mean Forex is a simpleton’s game. You do need to be aware of the relevant countries’ macro-economic situations.
2. Trading Times
The Forex market is the most liquid in the world. It’s open 24 hours. The stock market however (or at least the Singapore Exchange) is only open from 9am to 5pm.
This is both good and bad. It’s great in that Forex trading is convenient and fast. But it’s terrifying because you’ll wonder how much money you’re making or losing with every passing second. Fortunes really can be made or lost in moments, and you need to sleep while the market doesn’t.
If you’re the highly-strung type, this is the sort of thing that can ruin your life. Your boss and colleagues won’t appreciate you checking the market every 30 minutes.
For Forex trading, you only need a margin of 2%. In other words, to open a new position that requires $200,000, you would only need $4,000 of your own money (2% of $200,000).
The leverage can also be expressed as 50:1. For every $50 you want to trade with, you only need $1 of your own money. You may even be able to find higher leverage than that (e.g. 200:1). But if 200:1 leverage strikes you as a good idea, remember this website.
We can help with your nigh-inevitable second mortgage, or just get you some bread so you won’t eat old newspaper for lunch.
(What we’re trying to say is, don’t borrow so much. It’s a bad idea.)
It’s hard to get this much leverage in the stock market, where the ratios are often around 2:1.
Volatility refers to the extent of price fluctuations over time. It’s the whole point of trading: the idea is to buy when the price is low, and sell when it’s high.
Some stocks, particularly blue chip stocks, are not very volatile. Their prices remain quite constant, which makes them attractive to passive investors. There is no counterpart to them in Forex, where currency pairs fluctuate all the time.
Of course, if you choose to speculate with stocks, you could face just as much volatility as in the Forex market.
Ultimately, Forex trading is ideal for “hands-on” types, who like to call the shots. It may not be ideal for total beginners, particularly the ones who freak at seeing roller-coaster chart patterns.
For those with a bit of experience however, it can be a chance to make money much faster than in the stock market (thanks to that leverage!)
Do you prefer Forex or stocks? Comment and let us know!
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