As an investor, you may be interested in expanding your horizons and branching outside of the normal range of investments. When stocks and bonds just aren’t doing it for you anymore, one option that you may want to consider is the Forex market. Forex is short for “foreign exchange” and it deals with trading one currency against another in an attempt to gain profit from fluctuations in the exchange rate. Why would you want to invest in this market? In reality, Forex offers many advantages that other markets cannot produce.
Fewer Investment Choices
One of the advantages of getting involved with Forex investments is that you only have a few options to choose from. With a typical Forex broker, you may only have 20 currency pairs to choose from. By comparison, when you invest in the stock market, you have literally thousands of choices to consider.
In the stock and bond markets, it is easy to suffer from information overload. To make an informed decision, you must study a company’s financial statements and use other criteria. In the foreign exchange market, you only need to become an expert on a few different currency pairs.
Trading With Leverage
Another benefit of trading in this market is that you can trade with leverage. The type of leverage that is available to you in the Forex market is much greater than what you can find in other financial markets. In the stock market, you might be able to get 2:1 leverage. In Forex, you could potentially get 500:1 leverage. This allows you to control a large amount of money with a small amount of your own capital.
While this might seem dangerous, Forex brokers make it so that you cannot lose more than what you invest. Each broker has a minimum margin requirement. If your account falls below that balance, they simply close out the positions before your account balance goes into the negative.
Trading At All Times
Another unique feature of the Forex market is that it is available to trade at all times, except on the weekends. The market does not have a central hub, and it takes place on a computerized exchange. This means that you can trade 24 hours per day, if you wish. This gives you more opportunities to trade and make money. It also makes it easier for those who are trying to get started investing, even though they work full-time jobs.
One of the pet peeves of many stock traders is that they have to pay a commission to the broker every time they place a trade. If you trade frequently, these costs can really add up and eat into your trading profits. In Forex, you can work with brokers that do not charge commissions on each trade.
Instead, most Forex brokers are compensated with the difference between the bid/ask spread. When a currency pair is quoted, you will see two different prices on your trading platform. The difference between these prices is the “spread.” It is usually a nominal amount, and it allows you to save money on transaction costs when compared with other markets.
Size and Liquidity
The sheer size of the Forex market is an advantage in itself. The foreign exchange market is by far the largest financial market in the world with over $4 trillion in daily volume. This means that the market is so big that no single entity could come close to cornering it over an extended period.
With so many players involved, it also means that liquidity is easy to come by. When you place a trade, it usually gets filled almost instantaneously.
Even with all these advantages, the Forex market is not for everyone. If you are interested in getting started, it would be advisable to open a demo account with one of the many Forex brokers in the market. You can download the trading platform to your computer and essentially trade with “play money” until you feel comfortable. If you lose all of your play money and you do not like what you see, you’ve lost nothing in the process. Although it does have some advantages, Forex is still a financial market and you could lose money. At the same time, if you are willing to learn and can stick to a specific investing strategy, there is plenty of money to be made.
Luke Arthur is a Forex trader and writer on financial topics. He is the creator of the site Forex Trading Rookie and he enjoys helping others learn about the foreign exchange market.
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