Investing is a smart idea in general if you want to have your money make money for you. Standard savings accounts earn less than one percent interest, while investments earn an average of eight to 10 percent. Two of the most popular investment avenues are stocks and forex.
Most people understand stock investing. You are essentially buying a small share of a company. As the company does well, the price of the stock increases. Some stocks pay dividends when the company has done especially well. Stocks are a common part of most investment programs, such as mutual funds or individual retirement accounts (IRAs). There are many online trading programs available to help you trade, or you can look at investment services that handle the trading for you.
Forex stands for foreign exchange, and as the name implies, it deals with the international market. However, forex trading focuses on only one thing: currencies. If you've ever traveled abroad and exchanged your dollars for the local currency, you've done forex trading. The difference is simply scale. The forex market generally revolves around eight major currency pairs involving the euro, the U.S. dollar, the yen, the British pound, the Australian dollar, the Swiss franc, the Canadian dollar, the Australian/New Zealand dollar and the South African rand. For companies that facilitate forex trading for U.S. citizens, check out our best forex trading services.
Advantages & Disadvantages of Forex Trading
You can trade almost 24 hours a day Monday through Friday. The Forex market is not tied to a geographic area, so even when one stock exchange closes, another is opening. This gives you round-the-clock opportunities for trading during the week. However, not all trading times are ideal. Just because the market is open does not mean it's active. In order to make money, you need to trade on an active market. The best trading times happen when the markets that relate to the currency you are trading overlap.
It's a volatile market. If you are interested in a fast, exciting trading pace, forex trading provides it. Forex completes more trades every day than the New York Stock Exchange (NYSE), which means ample opportunities for those who prefer short-term investments with quick turnarounds.
Forex trading costs are minimal. Most forex brokers are compensated through the bid/ask spread, and, unlike stock brokerages, they do not charge extra commissions or transaction fees.
Forex is influenced by world events. Rather than focusing on a specific company and how its performance affects its stock, with forex, you are paying attention to the nation – everything from a natural disaster to an election can affect the value of its currency. To trade smart, you need to keep up with world events, making it an interesting pastime for people who enjoy staying abreast with what's happening around the globe.
You'll need a margin account. Trading on margin allows you to use leverage to get more for your dollar. With a margin account, you borrow money from your broker in exchange for keeping a small sum in your account (the minimum required margin) in order to increase your potential return on an investment. Leverage is typically expressed as a ratio, such as 50:1, 100:1, 200:1. For you, the investor, what that means is that for every dollar in your account, you can place a trade for $50 of the currency pair you're interested in. This means that you’ll get more in returns on the trades you win, but losses can be large for the trades you lose. Because of this, many forex traders make frequent use of stop-loss orders.
Forex trading is restricted in the US. The U.S. does not allow brokers for U.S. citizens to trade forex with a leverage higher than 50:1. Forex companies cater to citizens of many nations and some forex companies offer leverages as high as 500:1. Therefore, unless you have dual citizenship, you need to double check that your brokerage that can legally trade on behalf of U.S. citizens.
Advantages & Disadvantages of Stock Trading
Stocks are steadier. Even in low times, a strong company can keep its value or bounce back from adversity. Therefore, stocks are a better investment for those looking at the long term and who value stability over a chance at quick high returns with the equally high risk of losses.
It's easier to find an investment fund for stocks. If you are not interested in paying a lot of attention to the market, you can invest in stocks through mutual funds or retirement accounts. IRAs come with tax advantages you cannot get with forex trading. For many people, however, the advantage to investing in stocks over forex is that once you find a broker or investment firm you feel confident with, you can leave the day-to day investing decisions to them.
You don't have to react as quickly. Currency rises and falls in relative value quickly; in order to make money off money, you need to act quickly. Stocks tend to have more gradual trends you can track over time.
Stock trading is limited to exchange hours. You can only trade stock when that particular exchange is open – the NYSE, for example, is open 9:30 a.m. to 4 p.m. Eastern time. If you want to trade on your own but have a day job, you might not be able to schedule time to make trades.
Stocks can pay dividends. Depending on the company and type of stock, you may receive dividends as often as quarterly. Forex trading does not offer this.
Which is Best for Beginners?
Most financial advisors say it's not a matter of skill level so much as personality and goals that determines whether you should invest in forex or stocks. Certainly, if you are more inclined to "invest and forget" – i.e., investing money toward retirement – and are interested in gradual, long-term growth, then stocks are a better choice. However, if you crave a more active, hands-on trading experience and enjoy the excitement of a fast-moving trading market, then forex may be the best fit for you.