Investors looking to profit from fluctuations in global currency markets are increasingly seeing forex (foreign exchange) trading as a viable alternative to buying stocks. Buying and selling the currencies of different countries can be lucrative for smart investors, but is not without considerable risk. In this article, we look at the pros and cons of forex trading for investors new to the currency futures market.
Unlike traditional stock markets, the currency exchange market stays open all day. Because monitoring is ongoing, there is less risk that a drastic change will occur overnight. This greatly expands the possibilities for online trading: investors can follow their investment from anywhere, regardless of the time difference.
The high leverage of forex trading means investors can buy considerable amounts of currency on margin. Whereas in the stock market, investors are typically allowed 2:1 leveraging, American investors in the currency market are allowed 50:1 leveraging. Of course, this comes with added risks; with high leveraging it is easier to lose an amount greater than your investment.
Say you are considering buying stock in a publicly-traded equipment rental company. If the economy fluctuates and new home building takes a downturn, your stock will sink. On the stock market, earnings and production have the largest influence on your profit. With forex trading, however, it is possible to profit in a low market by going long on a currency investment.
Because currency markets are affected by a host of geopolitical and global economic factors, forex trading requires a different knowledge base than stock trading. Potential investors will need to have a strong grasp on debt, development, and interest from an international perspective. This makes it an ideal entry point for new investors who perhaps do not have a strong background in business, but are well versed in macroeconomics and international affairs.
The increased freedom of the forex market is truly a double-edged sword. Whereas the stock market is heavily regulated to promote transparency, in the forex market, which by its very nature is global in scope, there are increased possibilities of being scammed by unscrupulous brokers. Investors should be particularly aware of brokers based in developing countries where oversight is limited.
On the other hand, trading on the forex market gives investors a number of freedoms with regards to how you trade. The high leveraging possibilities of the forex market, mentioned above, are one example. Investors are not limited in the size of trade they make, and there are fewer rules about insider trading and conflict of interest to be concerned with.
As with all investments, there are no sure bets in forex trading. But if you educate yourself, invest wisely and manage your money well, there’s no reason you can’t see great returns from the currency market.