The international structure, volatility, and size of the foreign exchange market have all contributed to its monumental success. With very high liquidity in this market, huge amounts of money can be and are invested, without influencing the rate of currency pairs.
Large positions are accessible to forex traders because of the low margin requirements often used by most brokers in the industry. For instance, it’s easy for a trader to manage a position of US$50,000 by investing at least US$500 upfront and then getting the rest of the money from the broker as 'leverage'. This type of leverage is also risky because investors can gain large profits when rates change in favor of the trader but there is also the risk of experiencing substantial losses when rates are not favorable. In spite of this risk in forex trading, the value of leverage made accessible to forex traders attracts many speculators.
Forex trading is the only market that is really open 24 hours a day with substantial and constant liquidity. For those who have regular jobs or a hectic schedule, this is the ideal market for trading. The largest trading centers are available around the world, which eliminates the need to wait for business hours. For instance, as the US forex market closes, the Japanese market opens, making it easy to trade anytime.
Even though forex trading is more exciting for investors, the risks are also greater compared to traditional equities trading. The very high leverage in the forex market means that the large gains could easily turn to substantial losses. This could wipe out the entire investment in minutes. This is crucial for new forex traders to understand. Because of the substantial investment involved in the forex market as well as the number of players, investors must quickly react to news, which could lead to sudden changes in the prices.
Although forex positions don’t have the tendency to change suddenly in a way similar to equities on a percentage basis, though they can such as in the recent cases of high volatility in the Swiss franc and Russian rouble, it is the high leverage in the market that forms volatility. For instance, if you have access to 100:1 leverage on $500 invested, you basically have $50,000 capital. In the equities market, many traders don’t use leverage, so a one percent loss in the value of the stock on a $500 investment will only mean a $5 loss. It is crucial for new traders to consider the risks involved in forex trading before making an investment. It will be easier for you to strategize your moves perfectly if you are aware of both the pros and cons of forex. So make sure you step up your fiscal literacy if you plan to experiment in this market.
What is the Difference between Equities and Forex Markets?
One major distinction between the equities and forex markets is the number of instruments traded. The forex market has few instruments compared to the thousands in the equities. Most forex traders invest in the four major pairs: USD/JPY, USD/CHF, EUR/USD and GBP/USD as well as the three commodity currency pairs like AUD/USD, USD/CAD, and NZD/USD.
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