New investors tend to think of two things when they start deciding where to put their money: stocks or currencies. Although they’re not the only financial vehicles around, they’re among the biggest in volume and most well represented in news and media. They’re also the most frequently compared, although at the end of the day they each have their pros and cons like any other venture. But how does the stock market differ from foreign exchange? Here’s a look at some of the contrasts.
Availability: As we’ve often said, the forex market is open 24/7. The stock market has fixed trading hours, which presents several drawbacks. For one thing, you can’t react by the minute to influential events. When Lehman Brothers went bankrupt, forex traders made their move right away, many of them from the comfort of their own homes. Stock traders, on the other hand, had to wait and then cram themselves into the trading floor!
Tracking: Most spot forex traders keep their eye on only eight major currencies and four currency pairs—the world’s largest and most frequently traded currencies. It’s no sweat compared to the thousands of stocks listed on NASDAQ and the New York stock exchange alone. Of course, what works to the stock market’s advantage is that risk can be spread out between different stocks; there’s only so much spreading you can do with eight currencies.
Transaction cost: Forex brokers will charge a service fee, but most do not charge commissions for online or over-the-phone trades. In fact, forex has one of the lowest average transaction costs among financial markets. This is largely because forex brokers make most of their money from the bid/ask spread. Stockbrokers are the essential middlemen; they are part of a centralized exchange and have little choice but to get paid from the money that goes through them.
Monopoly and control: Among the main players in the stock market are mutual funds, an investment scheme in which investors pool their money and a fund manager makes investments on their behalf. Mutual funds will often buy or sell large volumes in response to market situations, making it prone to drastic changes. The large volume, liquidity, and number of participants in the forex market protect it from similar blows.
These are just some of the pros and cons between stocks and currencies. While forex has some obvious advantages, stocks also have their strengths. Most investors advise a variety of investments so that you can get the benefits of each one while shielding yourself from the risks.