Investing in FOREX or investing in Stocks? Understand the benefits and risks of each Market
So, you have the money to invest, but you don’t know whether to buy Stocks or try something new, like FOREX for example.
Before we describe what are the benefits of FOREX, lets remember what are Stocks. Stocks have been a popular investment for hundreds of years. Companies issue stocks to raise capital for expansion and new projects, and each share of the stock represents a partial ownership in the company. Basically speaking, when you buy stocks you invest in the company and in the market it is working in.
Hence, when the company does well and makes a profit, the value of the stocks rise and you can sell your shares for a profit or hold on to the stock for even more gain in the future. Sometimes companies will issue dividends – part of the profits that are distributed to share holders, another way for you to make a profit.
Stocks are traded on Stock exchanges. Most stocks are bought and sold through brokers (agents) who charge a commission or fee for this service. American stock exchanges include the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ). Most stocks are only listed on one exchange, although large companies may have listings on several exchanges.
Stocks were traditionally seen as long-term investments. So-called 'blue chip' stocks - those having proven value over many years - may form the backbone of an investment portfolio. Short-term traders (Day traders) exist, but it is a relatively new phenomenon made possible with the advent of Internet trading. Day traders attempt to take advantage of large daily fluctuations in the market by buying and selling many times in one trading period. It is relatively risky and broker commissions charged on each transaction reduce any profits realized.
Stocks may sometimes be bought on Margin, meaning that the investor borrows money to buy the stocks. Margin rates are usually around 50% - the investor can borrow as much as half the value of the stock.
The Foreign Exchange Market (FOREX) is quite different from the stock exchange. In contrast to the stock exchange, the FOREX is primarily a short-term market. Most traders enter and exit deals within a 24-hour period – sometimes within a few minutes. Many FOREX trades can be made in one
day without building up a large brokerage fee because FOREX trades are commission free; hence, you keep all of your profit. Brokers earn money by setting a spread – the difference between asking and selling prices.
FOREX is the largest financial market in the world. It is handles transactions worth $1.5 trillion every day ($1,500,000,000,000). By comparison, all the American stock exchanges combined handle daily transactions worth about $100 billion ($100,000,000,000), 15 times smaller than FOREX. It is not located in any one location, but in the virtual space of the Internet. Trading markets are located world-wide and because of difference in time-zones trades can be made 24 hours a day, 5 days a week. Trading begins in Sydney, Australia on Monday morning (Sunday afternoon New York time) and continues non-stop until Friday afternoon New York time.
The huge volume of FOREX and its around the clock availability, means that it is one of the most liquid markets in the world. There is always a buyer and seller for any type of currency because the world economy relies on the movement of goods from country to country. Stock exchanges have more limited trading hours. While it is possible to trade on exchanges worldwide, each exchange is independent and operates for just 7 hours a day. There is no way to buy or sell a certain stock that is only traded on one stock exchange when that exchange is closed.
FOREX has even more advantages compares to Stocks: It is more predictable than stocks, it follows well established trends, it allows high leverage – typically 100:1 instead of 2:1 on the stock market; and it doesn't require a large investment – mini accounts as small as $250 can get you started in FOREX.
The big question is what is Best for you? Are you looking for a Day-Trading constant activity, with its advantages, or a long-term investment. Know the answer and you know the nature of your next investment.
More FOREX articles can be found at http://forex.beyogi.com - The Foreign Exchange Market Explained.
About the author:
Ofer Shoshani is the Editor of beyogi (http://forex.beyogi.com) - The Foreign Exchange Market Explained where many more articles like this one can be found.
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest / trade in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading.
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