The long-standing debate as to whether the forex market is better than the stocks market, or vice-versa, continues unabated by the proponents of each. Participants of the two markets firmly espouse the notion that their market is better than the other. Turns out that both markets have advantages and disadvantages depending on the type of trading that is done. Both markets are served by specialist brokers that offer sometimes both or just one trading option. Selecting the right broker is always a challenge based on the trading features that people require.
Trading vs. Investing
First, we must distinguish the difference between trading and investing. Many market participants use the two terms interchangeably. For the purpose of “Investing,” an investor will analyze the strength of the underlying corporation’s FUNDAMENTAL data (earnings, revenues, financial ratios, etc.) in order to identify stocks that are priced below market value, and therefore perceived it to be a good investment. The investor will than take a long position (buy the stock) and hold it for the long term until such time that the stock price reaches and/or exceeds its market value; at which time the investor may choose to liquidate the stock to realize the profit from the favorable movement in price resulting from the strength of the corporation. By contrast, traders analyze an asset’s historical PRICE DATA using technical analysis to forecast price movements (up or down) that result from disparities in the asset’s supply and demand of the moment. A trader will attempt capitalize on by initiating long and/or short positions with a short-term time horizon for taking profits.
For the investor, the stock market is a better market for investing. The chart for Microsoft (MSFT) below shows a general uptrend since June of 2009. This is a typical pattern for a stock of successful corporations.
WEEKLY CHART: Microsoft (MSFT)
The executive management of the corporation has a fiduciary responsibility to expand the corporation for the sake of increasing shareholder equity. This is why stock charts for successful corporations always show an upward long-term trend.
The characteristics of the forex market are much better suited for “Trading.” The chart below shows the GBPUSD for the same time frame.
WEEKLY CHART: GBPUSD
The GBPUSD price chart shows a constant “Ebb and Flow” that is typical for currencies pairs. This allows for traders to employee technical analysis for trading with greater success.
Other Advantages for “Trading” the Forex Market
First and foremost are the limited barriers to access. Forex trading accounts can now be opened with some brokers with less than $100, and micro-lots of 1/100 of a standard lot are offered as trading instruments. Coupled with high leverage, this means that a position in a currency pair can be initiated for less than $50. Such small scale all but eliminates any cost barrier to entry, unlike the stock market which requires inordinate amounts of capital to trade.
Although the forex market is much larger in terms of total daily volume, there are less than 40 currency pairs that are traded with any practicality. Of those, six pairs are the most widely traded (referred to as the major and minor currencies). Unlike the stock markets that have well over 10,000 tradable stocks. The forex universe is much more manageable to trade. The amount of knowledge required to get started trading the forex market is not as overwhelming as other markets.
The absence of restrictive government regulation can also be considered an advantage for the forex market. This allows for a true market to exist with only market forces allowed to determine prices. However, lack of any regulation can also be a disadvantage. For the forex market, regulations vary from country to country, but are generally less restrictive the that of other markets. If you are just starting out in the trading space, it would be worth reviewing the best brokers for beginners and the top trading platform article on this site.
The forex market trades 24-hours per day, 5 days per week. This allows for more trading opportunities. It also eliminates the overnight dilemma that stock market traders must contend with. Holding stock positions overnight can be very risky. If something happens that causes a major price move during the overnight, having to wait till the next morning to exit the stock position may result in losses.
The most practical advantage of the forex market is the high degree of market liquidity. Traders can trade at virtually any scale. From the $100 beginner, to the multibillion-dollar institutional trader, the forex market can accommodate any size.