Trading FOREX (foreign exchange market, FX) has many advantages over trading in other markets; among the most significant benefits, worth mentioning: liquidity, 24hrs market, large leverage, low transaction fees, small initial investment, specialized trading procedures, and the possibility to trade from virtually anywhere in the world.
1. Operating 24 hours a day
The FX market is open 24 hours a day from Monday to Friday. Whether it’s 6 PM or 6 AM, somewhere in the world buyers and sellers are constantly trading currencies. FX market operators can always react immediately to important news. Unlike the stock market, gains and losses are not affected by earnings reports announced after the market closure, calls with analysts, or falls in the level of operations due to “pending news” or unexpected announcements.
2. Increased liquidity
With a daily trading volume over 50 times higher than the New York Stock Exchange, there are always brokers willing to buy or sell currencies in the FX market. The liquidity of the FX market – especially for major currencies – helps ensure price stability. Traders can almost always open or close a position at a fair market price, thus representing a significant advantage of the FOREX market.
On the other hand, due to the lower trading volume, investors in the stock market are more vulnerable to liquidity risk, resulting in higher spreads or price changes for relatively large transactions.
3. Leverage up to 400:1 in the forex market
Investors use leverage to increase the returns that can be provided on investment. To make an idea, a 400:1 leverage means that if the trader has an account with $1,000, actually he can speculate as if the amount was $400,000. Means one can make money as if they have $400,000, but if lost, they would be limited back to $1,000 – the initial invested amount. The higher the leverage, the greater the risk, so it is recommended to use low leverages to avoid losses. Some brokers are currently limiting the maximum leverage for clients up to 100:1 or 200:1, right for this reason.
4. Less venture capital
Less venture capital is required in the FOREX market compared to other markets. Some brokers allow opening of accounts with only $1 (yes, you read it right, just one dollar). However, the minimum investment is usually $100 on average. Of course, one can not expect to make a fortune out of such a small investment, but they can dare to enter the FOREX market without risking big money.
5. Specialized Operations
Market liquidity allows investors to specialize in only a few currencies. About 85% of all transactions occur in the eight major currencies: USD, EUR, GBP, JPY, CHF, CAD, AUD, NZD. This allows them to scrutinize the economic news that will help predict the evolution of the world markets so they can take the advantage of their money and make wise investments.
6. Lower transaction fees
The FOREX market is considered amongst the financial markets with the lowest operating costs. Most brokers charge based on the following two schemes:
- Spread – The brokers charge a different price for the buy and sell operations, and this difference is the broker’s revenue.
- Spread and Commissions – Most brokers in this scheme charge the traders with a commission fee; in return the spread is very small; so even transaction costs may be lower compared to the brokers that charge spreads only.
7. Equal profit potential in both rising and falling markets
In an open FOREX position, the trader has a long position in one currency and short in the other. When a trader buys a currency, assuming that the price will increase, they are is in a ‘long’ position. A short position is when the trader sells a currency, anticipating that it will depreciate. In such case, the investor benefits from a decline in the market price.
8. Operating from anywhere
As the transactions have no physical place to get underway, the trading operations can be performed from virtually everywhere in the world where an Internet connection is available. The investor needs the internet connection to access the broker’s company website.
To conclude, investing in FOREX may be a wise decision for newbie investors as long as they assume the risks and set suitable procedures to control their operations to minimize losses as much as possible.
Kidal Delonix is a contributor to Mr. Hoffman's blog. The views and opinions are entirely his/her own and may not reflect Mr Hoffman's views.
