• 50:1 Leverage to 400:1 Leverage
• Lower transaction costs
• Equal access to market information
• Profit potential in both rising and falling markets
The main advantage of the Forex market over the stock market and other exchange-traded instruments is that the Forex market is a true 24-hour market. Whether it’s 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading Forex so that investors can respond to breaking news immediately. In the currency markets, your portfolio won’t be affected by after hours earning reports or analyst conference calls.
Recently, after hours trading has become available for US stocks - with several limitations. These ECNs (Electronic Communication Networks) exist to bring together buyers and sellers when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, stock traders must wait until the market opens the following day in order to receive a tighter spread.
With a daily trading volume that is 50 times larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Investors can always open or close a position, and more importantly, receive a fair market price.
Because of the lower trading volume, investors in the stock market and other exchange-traded markets are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.
50:1 Leverage to 400:1 Leverage
Leveraged trading, also called margin trading, allows investors in the Forex market to execute trades up to $250,000 with an initial margin of only $5000. However, it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great. A more pragmatic margin trade for someone new to the FX markets would be 5:1 or even 10:1, but ultimately depends on the investor’s appetite for risk. On the other hand, a 100:1 leverage would be the foremost suggested margin trading to use for the best risk and reward return.
Lower transaction costs
It is much more cost efficient to invest in the Forex market, in terms of both commissions and transaction fees.
Commissions for stock trades range from a low of $7.95-$29.95 per trade with on-line brokers to over $100 per trade with traditional brokers. Typically, stock commissions are directly related to the level of service offered by the broker. For instance, for $7.95, customers receive no access to market information, research or other relevant data. At the high end, traditional brokers offer full access to research, analyst stock recommendations, etc.
In contrast, on-line Forex brokers charge significantly lower commission and transaction fees. Some forex brokers general, the width of the spread in a FX transaction is less than 1/10 as wide as a stock transaction, which typically includes a 1/8 wide bid/ask spread. For example, if a broker will buy a stock at $22 and sell at $22.125, the spread equals .006. For a FX trade with a 5 pip wide spread, where the dealer is willing to buy EUR/USD at .9030 and sell at .9035, the spread equals .0005.
Equal access to market information
Professional traders and analysts in the equity market have a definitive competitive advantage by virtue of that fact that they have first access to important corporate information, such as earning estimates and press releases, before it is released to the general public. In contrast, in the Forex market, pertinent information is equally accessible, ensuring that all market participants can take advantage of market-moving news as soon as it becomes available.
Profit potential in both rising and falling markets
In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling FX market. The ability to sell currencies without any limitations is one distinct advantage over equity trading. It is much more difficult to establish a short position in the US equity markets, where the Uptick rule prevents investors from shorting stock unless the immediately preceding trade was equal to or lower than the price of the short sale.