There are several reasons why investors should choose foreign exchange (forex) trading over stocks trading. For starters, the forex market is the world’s largest market in terms of daily transaction volume, and it’s also considered the most liquid. This market is highly accessible and it’s open 24 hours a day, 5 days a week. Furthermore, investors interested in trading forex can make use of far more leverage than they could in trading stocks.
The World’s Largest Market
Global market participants trade more than US$5 trillion worth of currencies per day, according to the Bank for International Settlements (BIS).
Daily trading volume averaged US$5.1 trillion in April 2016, according to BIS’s triannual survey, which is the most thorough poll of its kind.
While this figure of US$5.1 trillion (or roughly US$213 million per hour) may seem high, it’s more than 5% below the record US$5.4 trillion reached during April 2013, according to the BIS.
Because the global forex market is so large, it offers traders significant liquidity, which is the ease for traders to exchange one asset for another. In this case, the significant size of forex market makes easy for traders to enter and exit positions.
In addition, liquidity can help provide them with lower transaction costs, as financial institutions charge less to set up trades. Highly liquid markets can also help protect traders from price manipulation.
When a market enjoys substantial liquidity, it can easily handle large increases in trading volume without experiencing significant changes in price, making the market less vulnerable to sharp changes in trading volume aimed at causing price volatility, like in stock markets.
One major draw of forex trading is that the currency markets are open 24 hours a day. Investors around the world want to trade currencies. Companies require currency for international trade, and central banks have been making use of foreign exchanges since 1971, when the value of most currencies began to “float.”
Fortunately, there are intermediaries—including banks, broker-dealers and other financial institutions—located in many different cities to help service this demand. For individual traders, 24-hour access simply means greater opportunities.
Investors will find it far easier to combine this kind of trading with their part-time or full-time job. For example, if a person works a traditional, full-time job between 9 AM and 5 PM in their time zone, they can trade after they get out of work.
Traders might trade forex instead of stocks because when trading the former, they can obtain far greater leverage. By borrowing money to make trades, investors can potentially magnify their returns. However, trading on leverages is a two-way thing where it could also lead to losses being magnified.
As outlined, there are several reasons why investors should go for forex trading over stock trading. By trading forex, investors can access a market that is far larger in scope than that of the stock market. Because of its size, the stock market offers greater liquidity, which means that investors may be able to enjoy lower transaction costs and more easily enter and exit trades.
The forex market also offers traders greater flexibility than the stock market. Given that it’s open 24 hours a day, investors can easily combine forex trading with other responsibilities. Finally, the forex market offers greater leverage than the stock market, a factor that can potentially amplify gains.
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