• Thu. Feb 22nd, 2024

Trading Forex Versus Equities – Benefits, Drawbacks And Considerations

The reputation of the American stock market has attracted thousands of fortune-seeking traders to the world of equities. 

According to a report by Statista, over 58% of American adults, approximately 150 million people, invested money into the stock market in 2022. A symbol of America’s capitalistic prowess, the stock market is deeply embedded into North American financial culture. Government-led initiatives like the 401(k) and the Individual Retirement Account (IRA) paint the stock market as a pathway to early retirement, inviting and encouraging participation from millions of traders.

The thoughtful trader is at a crossroads when considering equities as a potential market to trade. Its popularity inspires confidence in the trader’s path to riches and success, but some of its inherent qualities may not be suitable to the trader’s personality, strategy or lifestyle. A trader’s success may hinge on this realization.

Equities Vs. Forex: What’s The Difference?

Thousands of equities traders have transformed the stock market into the bedrock of their trading careers. Traders like Jesse Livermore, Mark Minervini, Paul Tudor Jones and others have proven, on countless occasions, that wealth can be made through actively trading the stock market. The winners of the U.S. Investing Championship are often active stock traders. 

The benefits of trading equities are plentiful. Equities are accessible, generally perform well in bullish periods, and do not need active interference over long periods of time. There are libraries full of studies on the performance of equities and how one can use them to generate wealth. 

Some traders, however, may find some of the inherent qualities of equities a hindrance to success. Some of the drawbacks of trading stocks include: 

  1. Potentially illiquid assets
  2. Difficulty playing the short side
  3. Low leverage
  4. Limited trading hours

While not applicable to every stock, stocks with low average trading volume are often considered to be illiquid assets. The low trading volume increases the bid-ask spread, making it difficult to enter and exit the stock at favorable prices. This feature increases risk and can erode trading edges. Additionally, the equities market is notorious for its difficulty in playing the short side, requiring margin and commanding “locate fees” that could also erode a trading edge. Finally, compared to other markets, the equities market is limited in the leverage it offers traders and in the hours available to trade. 

The forex market, one of the largest financial markets in the world, may be a haven for traders struggling with the issues above. Compared to the equities market, the forex market includes benefits like:

  • Liquid assets
  • Ease playing both the short and long side
  • High leverage
  • More trading hours

Due to the sheer volume of trades on popular forex pairs, slippage is generally a redundant concern for forex traders. Additionally, selling a forex pair comes as easily as buying in the forex market, a stark contrast to the equities market. FOREX.com, a leading forex broker, offers forex traders 50:1 leverage in the U.S., meaning traders can purchase up to 50 times their account value. Finally, while the forex market is still limited in its trading hours, the market is open 24/7 from 5 pm EST Sunday to 5 pm EST Friday, more hours when compared to the 9:30 am to 4 pm on weekdays schedule for equities.  

Like any market, there are risks and issues associated with forex trading. The higher leverage, for example, means risk management is even more important in forex than in other markets. Forex traders also need to be cognizant of global economic conditions and reports, while equities traders can afford to be a little laxer with these reports. 

Traders curious to see if forex is the right fit for them should check out FOREX.com, one of the world’s leading forex brokers.

Featured Photo by Avinash Kumar on Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice. 

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By admin