Should You Invest In The Forex Market Or In Stocks?
Companies typically issue stock when they wish to raise capital and purchase of this stock represents a partial ownership in the company. In return many companies will often issue a share of their profits to stockholders in the form of an annual, or sometimes biannual, dividend payment. In addition, if the company does well the value of its stock will increase and stockholders may then profit from the sale of their stock.
Stocks are traded on a number of stock exchanges through brokers including the London Stock Exchange (LSE), the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ). There are also a number of other major stock exchanges around the world. In most cases stocks will be listed with one particular exchange, but larger international companies may well list their stock on several different exchanges.
Traditionally stocks have been seen as long-term investments and purchasers have normally been looking at buying stock to hold for periods of five years or more. Many stocks, often referred to as "blue chip" stocks, are issued by companies with long and proven track records and traditionally form the core of many investment portfolios.
Short-term trading in stocks is a relatively new phenomenon and has been made possible to a large extent with the arrival of Internet trading. Here day traders try to take advantage of often large daily movements in the market by buying and selling many times in a single trading period. This is however a fairly risky business and any profits made can quickly be reduced by broker commissions which are charged on every transaction.
The Forex, or foreign exchange, market is quite different from the stock exchange. The Forex market is principally a short-term market with most traders entering and exiting deals within a single day and, sometimes, within as little as a few minutes. Forex trades are also "commission free" which means that a large number of trades can be made without running up a large brokerage bill. In the Forex market brokers earn their money by setting a spread in the price for buying and selling, known as the asking and selling prices.
The Forex handles transactions worth $1.9 trillion every day is the largest financial market in the world. To really appreciate the size of this market you have only to compare it to all of the American stock exchanges which, combined, handle daily transactions worth about $100 billion. The huge volume Forex trading also means that it is one of the most liquid markets in the world and that there is almost always a buyer and seller for any currency as the world economy is based very largely on the movement of goods from one country to another. The stock market by contrast is far less liquid and many stockholders choose to hold their investments for considerable periods of time.
Unlike the stock markets, The Forex market has no central location and trading markets are located throughout the world. Also, because of differences in time as we move across 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.
Stock exchanges offer far more limited trading hours and, while it is theoretically possible to trade on stock markets in Japan while the American markets are closed, many stocks are only listed on specific exchanges and cannot be traded elsewhere. Most stock exchanges are open from Monday through Friday, typically for a period of seven hours each day.
The Forex market tends to be more predictable than stock markets and often follows fairly well established trends. It also allows traders to take advantage of leverage which is typically as high as 100 to 1 (against 2 to 1 found on most stock markets) which means that investors can participate in Forex trading with a minimal investment. Indeed many brokerages today offer mini Forex account which can be opened with as little as $250.
Related Tags: trading, currency trading, forex, foreign exchange, mini forex, markets
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