Investing for the first time requires a lot of time, research and it is always recommended to be done with financial advisor assistance. After all, you’ll be using your hard-earned money and you wouldn’t want even a single cent to go to waste. On top of the difficulty that comes with familiarizing yourself with various significant terminologies and learning about investing as a whole, choosing which financial market to invest to can also be overwhelming. To help you get started, here are some of the things you need to know about forex and stocks.
According to an article on Medium, the stock market is a type of financial market in which investors connect and trade investments such as stocks to buy a share of a company. You can think of the stock market as an auction company wherein buyers and sellers negotiate with each other to achieve a successful trade.
There are many advantages to stock investing. First and foremost, it is one of the best ways to take advantage of a growing economy. As the economy grows, so do corporate earnings that rely on sales. The stock market makes it easier for people to buy company shares through brokers, financial planners or even online websites, and selling stocks is also just as easy. The Balance’s article about the stock market highlighted that since stocks are “liquid” you can easily turn your shares into cash with minimal transaction costs by selling them whenever you need to.
Of course, like everything else, investing in the stock market also comes with its own disadvantages. Choosing a company to buy shares from usually takes a lot of time, as a lot of research needs to go into the process to determine profitability. You must also take the time to learn about financial statements and annual reports and constantly stay abreast of developments within the company you’ve decided to invest in. Sapling’s article on stocks also attests that the market is highly volatile. Meaning to say, it is easy for the market to go up and down. While volatility to the upside isn’t that much of an issue, downward volatility can effectively damage your investment.
The foreign exchange (Forex) market is simply a market in which international currencies are exchanged in pairs. Forex News Now further explains that even though the buying and selling part also occurs in this market, making a “sale” in Forex can also mean you are buying something. Since currencies come in pairs, say for instance USD and EUR, when you sell USD, you will get paid in EUR. So in a sense, you are also buying EUR when you sell USD.
One of the advantages of Forex is being the largest and most liquid market in the world, with FXCM reporting an average daily trading volume exceeding $5 trillion. Although stocks are also liquid, Forex major pairs usually have extremely low spreads and transaction costs. Like in most cases, Forex Trading involves some degree of risk, but what’s good about forex is that most, if not all, platforms offer free demo accounts to potential traders. This way, beginners can hone their skills and test out various novel strategies. Forex, unlike stocks, is not transacted over a traditional exchange and it can go on all around the world during different countries’ business hours and trading sessions. Simply put, it’s a 24/7 market that you can try your hand in at any time.
Arguably, the biggest disadvantage to the foreign exchange market is low transparency. Finance Origin explained that due to the decentralized and de-regularized nature of the market, brokers usually dominate. Because of this, there is a tendency for the market to be low in transparency. Traders might not be provided with the price of their selected currency and only have limited access to trading quotas since they will all be furnished by your selected broker. Investing in this market also requires a self-directed learning curve. If in the stock market, a trader could get professional assistance from trade advisors and relationship managers, Forex traders have to rely on online learning tools and materials. Thus, they are to trade on their own with little to no assistance.
Whether you choose to invest in the stock market or the foreign exchange market, your success will heavily rely on how much you know and the depth of your understanding of the market. As a new investor, it’s important to not only brace yourself for the ups and downs of investing, but also for the endless research that the practice entails.