I’ve started my trader/investor carrier from the stock market. I’ve been trading successfully long before Forex. So, what brought me to Forex? Today I can surely say – Margin. These two markets are alike and different at the same time. Now when I personally got through them, I’d like to share my pros and cons.
Profits and volatility
In my opinion, the statement about foreign exchange market (Forex) being volatile is a mistake. Try to trade without leverage, i.e. 1:1. Currency pair’s daily fluctuations don’t go higher then 1% in general. For example, take a pair EUR/USD, the current price is 1,26. Let’s assume, the price goes 100 pips down reaching 1,25. We loose figure or 0,79% ((1,26-1,25)/1,26*100%). Can you call it volatility 0,79%? Now imagine trading with 1:100 leverage and 10K deposit, 100K deal (1 classic lot). EUR/USD fluctuation is 0,79%, but in result, we lost 1000 USD or 10% of deposit (0,01/1,26*100%). Leverage makes a volatility illusion on Forex. 300 or 400 pips movements/day (one direction) on G7 pairs and it’s crosses, i.e. 2-3% is a very rare case but possible. I’d like to emphasize the fact that 100 pips percentage value is not equal for different pairs – for example: GBP/JPY and USD/CHF. But most of the traders trade with the same lot of different pairs, without taking into account higher risk.
Things work in another way with the stock market. If volatility exists, it’s the place! Let’s take S&P index. Daily fluctuations 1-2% is a common thing, it might get higher in Nasdaq on particular stocks. Lower company’s capitalization, higher it’s volatility (it’s a fact, it’s easier to turn 100 million into 200, then one billion into two). On stock, you need 10% growth to earn 1000 USD from 10K. On Forex – 0,79% (see above). Perhaps, you say 10% daily growth is impossible? More than possible! In addition, you can clearly see an increasing trend on stock indexes.
That’s the reason I love stock. First of all, ‘absolute zero’ – in other words, company’s bankruptcy or zero stock’s price. You can not got lower then this. In theory, the same thing is possible with foreign exchange. I don’t know about you, but I’ve never seen it myself. Especially taking into account foreign exchange Forex terminal brokers.
Secondly, besides ‘absolute zero’ stock has Fair value, i.e. book value. Follow simple rule – if stock price is lower then book value, it’s time to buy or vice-verse. It’s more complicated on Forex. For example: EUR/USD cost was 1.40 and dropped 1.26 in 2 months. Is EUR undervalued or pair is near it’s fair value? You can only technically find general value for pairs. Even considering demand, offer, interest rate it is hard to tell fair value. It’s the main disadvantage of Forex market on my opinion.
Hot and dangerous! Remember 1929 and margin call 2008, not that long ago. Market makers’ ideal weapon. On stocks, max leverage I’ve seen on the moment, was 1:10 on CFD. Generally you get 1:2 if trading though bank. Despite big opportunities offered, I advice to trade without leverage, the profit will not disappoint you. Buy on low and wait (buy and hold), let time work on you. even 100% per annum is not a limit…
Talking about Forex leverage, you can get up to 1:1000. Imagine, you can instantly turn 100 USD into 100 000 USD. It’s an ideal instrument to grow big and lose everything by taking one wrong decision. Important to know, higher your capital – lower leverage offered by forex broker, i.e. on 1 million own fund you can hardly get 1:1000. The best deal is 1:50, generally 1:25 to 1:10. Be happy with what you get. Nobody needs unnecessary risks – talking of brokers.
Volumes and Liquidity
Forex is like no other in this case. It takes less than a second to open/close trading orders. Works the same with any reasonable volumes. The market is full of demand and offer. In the case of the worst scenario – there is always Central Bank ready to buy it’s currency. Just to know: Forex daily sales estimated $4 trillion. Impressive isn’t it?
It works differently with stock market. There are blue chips (highly liquid companies, with huge daily volumes, for example, Google Inc., Apple Inc., Microsoft Corporation, Exxon Mobil Corporation…). A lot of Forex brokers offer CFD on these stocks in their terminals. The amount of these CFD generally doesn’t increase 30. However, it’s different from other stocks. Not always you can sell/buy a particular amount of stocks, even on stock price – there might be no demand/offer. For example, it’s not easy to sell shares on market price, that were up 300% in one-two months. You will need to use special strategy on buying/selling – usually, these kinds of shares are sold/bought in little amounts. Each share considered individually – kind of stock market, share daily volume… In my experience, trading through the bank, there were cases of partial order execution There was no possibility of fully sell/buy shares. In any case, by buying shares you make an investment in a business. If you understand how the model works – you are on the right way.
Factors affecting price
Let’s get clear which factors affect foreign currency pairs. You can tell at once – there are plenty of factors. Starting from politics – remember Greece problems in Eurozone, movements Libya or war in Iraq and to general macroeconomic statistics. The yield on government bonds, interest rates, risk appetite and much more… Usually, while trading with foreign currency you should follow the situation in 2 countries. Yes, in BOTH. For example, pair EUR/USD makes you follow the news and statistics both in USA and Eurozone (which contains multiple countries).
Stock market makes the problem easier. Most of factors are known already – free float, volume, book value, p/e…This simplifies trading. Still, you should follow corporate news, company’s field and general market situation. For most cases – you’ll need one country, except companies, which has diversified international business. Conclusion: the stock market has smaller information flow compared to Forex.
The Forex market is 24-hour market, that’s an advantage over the stock markets. You can customize your own trading schedule with the ability to trade during the U.S., Asian, and European market hours. Most Forex brokers are open from Sunday at 4:00 pm EST until Friday at 4:00 pm EST.
Trading in Forex, the choice is not so big as it seems. Generally, brokers offer G7 currencies and it’s crosses, exotic currencies are possible but very seldom. Fair to admit, most part of traders trade on Major pairs (G7), or prefer USD/JPY, EUR/USD, GBP/USD – testified by Dukascopy, FXCM, Alpari brokers open sentiments.
Things are different as usual in stock market. Companies listing only in US market exceeds 30.000 companies. Besides, there are OTCBB and Pink Sheets. Great choice, isn’t it? There will be offers for very pickable traders and investors, to suit every taste!
Brokers and fees
Every case is unique and should be taken individually. I’m talking about brokers now. Offers are in excess. On Forex many of them are fraudulent, that do not pay if you earned. That’s the worst thing that could happen in my opinion, worse then requotes and often disconnects. But let’s move to the brighter side. Before you open an account check the person you transfer money. Act so proverb ‘easy to earn, hard to get’ will has nothing to do with you.
Talking of fees, if you trade on Forex 1:1, the fee is less then in stock markets. For example: buying 100 000 USD (classic lot) brokers fee is 3 pips or 30 USD. If you buy stocks on the same amount of money the fee will be much higher. NB: most people trade on Forex with leverage 1:100 or even higher, and in this case fees are higher than on stock markets.
One of the myths saying ‘You can not start with little money on stock market’. I’ve heard many times something like – ‘as soon as I have 50K I go to stock market, what can I do with my 2-3K?’ Everything is possible. Everything! Do not wait while your savings reach 50K or more. Start today. If you want to know how the market works start with small money. Meanwhile, you can continue savings. By the moment you made your money, you’ll get personal investment experience. A lot of banks and internet brokers offer the possibility to trade shares with small sums.
Remember, 1000 shares per 2 dollars, that you buy and rise up 30% can bring you 600 USD. The risk is minimal – only company’s bankruptcy, which is not an often thing on markets.
To sum up everything above, the risk to lose your 2K on shares is much lower than on Forex. Remember how many thousands already lost on Forex.