Trading foreign exchange or Forex entails a lot of decisions. Unlike a long-term commitment, you can enter and exit the market as and when you deem fit.
Forex and your money
Any other forms of investments like Unit Trusts and REITs, you will need to keep your money for a period of time. But Forex is something that is almost entirely different. When it comes to investments like Unit Trusts, the choice is clear. If you are looking for an investment that will not tie you down for a long time, then Forex might be the best way to go.
Advantage of exiting any time
The upside about trading Forex as compared to bonds and long-term investments is the fact that you can exit the market at any time. In most cases, you want to do this because:
- You need to free up some funds in the short term
- You need to cut your losses
- You need to go into another investment
No doubt, you might get back lesser than you invested in the first place, but you can always do this and then perhaps re-group and strategize. With unit trusts or insurance, you might not have that luxury
Stay in control
In some cases when the market is bullish, it is a good time to be very profitable. In the stock market, you will need to wait for the price to rise considerably before you can actually be very profitable. Furthermore, after the price of the share goes up, it will only come down again, which means you are exposed to more risks again. If you are good in forex trading, you will be profitable just by using a small start up.
What about trading stocks?
When it comes to comparing between Forex and stocks, the one advantage the former has over the latter is leverage. How does this work? When you trade stocks, you normally do so with the leverage of at most two to one. Besides that, you need to have some form of requirements before you qualify. This is because not every stock investor is allowed with a margin account and that is what you need if you are looking for leverage in the share market. On the other hand, Forex trading is very different. All you need is to open a Forex trading account and you qualify to trade with leverage.
What about differences of liquidity?
You need to be very clear about this. You are actually buying shares of companies when you are trading stocks. This could be from a few dollars to thousands of dollars. The market price of the stock depends largely on the supply and demand of the market. On the other hand, it is very different on Forex because it does not depend so much on supply and demand. In fact, although it might differ and fluctuate, the market is always filled with a large amount of currency that you can trade in. This means that the currencies are quite highly liquid.
You are always quoted in pairs in currency trading. This means that you will want to know the economic condition of 2 countries when you are trading Forex. The difference with stocks here is that, if you buy the shares of Genting, you are only concerned with the health of Genting Group and not other companies. In fact, you are only concerned that the stock price will go up. In Forex, you need to know a bit more about two parties.
Between Forex and the stock market, the price sensitivity differs greatly. When you buy 100,000 shares, it might impact the price in the bourse. But the same number of shares you buy from a large corporation might not have any effect on its price at all. On the other hand, it is totally different with Forex. When you trade millions of dollars in a currency, it might not have any effect on the value and market price at all. In other words, your trade volume might not have much impact in Forex but it would in stocks.