What are the pros/cons of trading one given class of financial assets as opposed to another?

4 Answers

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   Ivory Wolf on Dec 21, 2011 Reply

   Hi Alex,

   You have so hit the target when you say “the underlying strategies and principles seem similar enough” – so true!! If you’re able to forecast the direction of a chart that is shown to you, it doesn’t matter what class of “financial asset” or method of investing you use. In the end, it comes down to what you feel comfortable trading, whether you understand the method of trading, and whether you personally can profit from that trading.

   When someone says the share market, or the stock market, they are simple referring to that. Stocks or shares. You can buy or sell those directly, but must have the entire amount of funding available for that purpose. Alternatively, you may be able to obtain a margin loan, that would then allow you to put in half of the purchase price, whilst your broker/bank puts up the other half. Now we’re introduced to the concept of leverage in order to control more of the market, which increases your risk, but also increases your potential reward.

   Then, there are super-doopa levels of leverage out there with strategies such as options, contracts for difference (CFD’s), futures and Forex.

   Regardless of your choice of instrument or strategy, start at a level that you’re comfortable with and then branch out into other areas. My personal preferences at the moment are options and CFD’s, but the concepts of Forex and futures sound rather appealing (futures require a bit more capital to begin with, whilst Forex can be traded with quite small amounts of capital, and the market is open virtually 24 hours per day, apart from weekends).

   Listen to your inner voice as to what you’re comfortable with, and you’ll be sure to make the right decision.

   Cheers!!

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   Mohamed Rabea on Dec 21, 2011 Reply

   There are many advantages to forex trading as compared to the stock market. However, beware that some of these advantages can be a double edged sword if you are not careful or don’t have the knowledge to take proper advantage of them while at the same time guarding against losses.

   1. Market Open 24 hours a day.
   You can conduct business twenty-four hours a day with forex. Stock market traders on the other hand have a limited time when they can trade. This “perpetual open market” is very handy for people who are just starting out trading forex. Stocks force you to trade only when the stock markets are open, but with forex you can schedule your trading whenever it is convenient for you.

   2. Margin = Leverage.
   The ability to trade on margin gives forex traders significant leverage in their trading and offers the potential to make extraordinary profits with relatively small investments. For example, with a broker that allows margin of 100:1 you can purchase $100,000 in currency with only a $1,000 deposit. Of course, leverage goes both ways and can lead to large losses if you are not careful.

   3. Liquidity and Trade Execution Time.
   You are trading in cash when trading forex. Stock markets on the other hand require an active seller of a particular stock. There’s no investment more liquid than cash, so forex trades are executed near instantaneously. There’s no sitting around waiting for your trade to execute.

   4. Market Not Easily Influenced by Individuals.
   The foreign exchange market is so incredibly huge that no one individual, fund, bank, or government entity can influence it for long. This is the opposite of the stock market where one negative appraisal of a company’s stock could send it into a tailspin.

   5. Only a Few Major Currencies to Follow vs Thousands of Stocks.
   There are only seven major currencies to follow when trading forex. Stock markets on the other hand have thousands of stocks available to trade not to mention new IPOs to evaluate on a regular basis. Following them all is all but impossible. With forex you can devote a lot more time to each of the seven major currencies. Some traders specialize in just 3 or 4 currencies and narrow their focus even further.

   6. No Bear Markets.
   you are trading to predict the direction of currencies either up or down with forex. Stocks on the other hand can experience long bear markets where seemingly everything is going down. Trading forex currency pairs is by definition an activity where you are predicting which currency will be going up and which one will be going down with every single trade. All you need to do to succeed is predict correctly, not always as easy as it sounds!

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   Matt on Dec 21, 2011 Reply

   The answers above are great, and I agree. The only other things I’d add, are that some believe that stock prices could be a little bit more open to manipulation (although it’s probably quite rare), while it’s almost impossible for anyone to manipulate the forex market(s).

   Another factor to consider is if you are going to be trading markets within a quick ‘in & out’ style, not holding onto a trade for very long, then you need to consider the spreads you are effectively paying – ie. how wide are they? Some stocks, that are less liquid can have wide spreads, while highly traded forex pairs like EURUSD can have very tight spreads – which would therefore be better to trade if your time frame is very short.

   If you want to trade both directions (up & down), then you’ll find this difficult with straight shares.
   You’d need to use something like CFDs, or options, or trade Forex.

   Other than that, it’s just a matter of personal preference. People can make money in any type of asset class. Perhaps the biggest factors are

   1). your personal inclination eg. if you’ve always looked at share prices in the evening news, then you will find share more interesting to trade and forex will bore you.

   2). what time of the day you will place your orders. If you want to do it at all sorts of odd hours, forex may be more convenient for you.

   Hope that helps.

   Best of luck!

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   Andrew on Dec 21, 2011 Reply

   The reason why people choose forex over stocks is because you can open a forex account with far less money due to high leverage’s, also because you can make fast money in forex were as you would need to invest in stocks for months or years. Do not get me wrong you the fact that you can make money fast also means that you can loose money fast.

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