If you’re tempted to make your way in the financial markets, there’s a growing number of potential options for you to target. However, there’s no doubt that the forex market stands out like a glowing beacon, particularly with a cumulative global value of around $1.934 quadrillion.
Of course, the forex market is also incredibly volatile and prone to sudden price movements, making it far less predictable than more secure sources of wealth such as stocks.
But in which scenarios does forex represent the best option, and what are the core advantages that derivatives such as currency hold over equities and shares?
Accessing a 24-Hour Market as a Short-term Trader
One of the main advantages of derivative assets such as currency is that they be traded without assuming ownership of the underlying financial instrument. This makes it possible to speculate on price movements in both directions, creating a scenario where you can profit even as a particular market declines.
Additionally, the forex market is split across three geographical sessions and remains open for 24 hours a day (and for six days a week). There’s even periods where such sessions overlap, creating a scenario where trading volumes can peak and drive sustained spikes in volatility.
In this respect, forex trading is ideal for investors with a healthy appetite for risk and a desire to leverage real-time volatility to their innate advantage.
Make no mistake; the forex market sees an incredible number of price shifts and spikes through each trading session, so there’s ample opportunity to execute a high volume of orders without being constrained by ownership.
No (or Minimal) Commission
While the margin-based nature of forex trading and the market’s high levels of leverage create a scenario where you can lose more than your initial deposit, it’s also interesting to note that a growing number of brokers are now offering commission-free access to this space.
The same cannot be said for stock trading; as almost all brokers charge a commission for buying and selling company shares. While this varies from one platform to another, this can eat into your profits and have a dramatic impact on your bottom line over time.
This is not to say that the commission charged to stock traders is particularly high, but there’s no doubt that it’s easier to access the forex market without paying out your hard-earned capital.
This is a key consideration for new traders, so long as they have a healthy appetite for risk and a keen understanding of how forex works.
The Issue of Leverage
We’ve already touched on the issue of leverage, which can be defined as the ratio of a trader’s funds in relation to the size of the broker’s credit.
More specifically, leverage refers to the amount of capital borrowed to open a specific position and chase increased returns, and there can be no doubt that this is considerably higher when trading currency as opposed to stocks and equity.
If you’re physically trading stocks, you’ll most likely have to operate without the benefits of leverage. The reason for this is simple; as company shares can be bought and sold at a clearly defined price and investors are often required to assume ownership as a secure store of wealth. Conversely, currency pairings are traded without ever affording ownership to investors, so you can access considerably higher levels of leverage that enable you to pursue significantly increased returns.
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