With an increased variety of financial investment options, investors can now lay their hands on more financial assets traded on the markets. Modern traders have access to instruments ranging from companies’ shares to ultra-liquid Contracts For Differences (CFDs) and forex markets. But making a light-hearted choice as to which type of trading instruments to invest is not a good idea because there are a few important factors for consideration.
The decision on whether to invest in forex or stocks is highly dependent on the individual’s risk tolerance levels and also trading style. Someone with a buy-and-hold strategy might be more suitable to enter the stock market, whereas a short-term trader, scalper, or day trader could search for markets with increased volatility.
The forex market is by far the largest financial market worldwide with daily trading volumes reaching sometimes more than $4.5 trillion. A lot of investors prefer forex markets because of the high liquidity they provide, their constant opening times (day and night) during weekdays, and also the quantity of leverage offered to traders.
Reputable stocks, also known as blue chips, are shares from long-operating and financially healthy corporations. They are sometimes strong enough to give profits during times of economic instability, and are known for paying dividends on a regular basis. These characteristics imply that these types of stocks are less volatile compared to many alternatives and are included by investors in their portfolios because of generating stable growth.
Volatility quantifies the level of fluctuations of financial assets’ price data, and it is vital for scalpers to be present and in high levels because they rely on volatility to make profitable short-term trading positions based on quick price swings. On the contrary, more risk-averse traders seek to invest in financial assets which are less volatile. Therefore, short-term traders have a preference in forex markets whereas longer term traders chose to place their funds in blue chip stocks.
Leverage is also a big deciding factor in deciding which financial market to invest in. Whereas stock traders are offered sometimes with 2:1 leverage on their investments, forex brokers offer to their traders considerably higher leverage ratios reaching even 400:1. However, bear in mind that leverage is a double-edged sword because even though it provides the opportunity to make substantial profits with minimal investment, it can also wipe out your trading account instantly when the market slightly turns against you.
Another important factor in choosing the right financial asset type for you is the trading hours. Stocks are usually limited to trading hours that are similar to working hours, around 09:00 to 17:00 on weekdays except holidays. On the other hand, forex markets are open for trading on a 24-hour basis because 3 trading sessions (Asian, European, and North American) are open in different times of the day and they provide around-the-clock trading activity.
The modern world of electronic trading gives the opportunity to investors to invest in more financial markets. The decision to enter stocks or forex markets is dependent to risk tolerance, availability of funds, and convenience. If a prospective investor is not available to trade during working hours, then the forex markets would be a more suitable option. But traders who have a more long term strategy and want to earn a steady stream of dividends might find that the stock market, and especially blue chips, could be the right choice. Before making this important decision of where to invest your hard-earned money, take a few moments to understand what your risk tolerance is and what your overall strategy is.
This article was written By David Parker from www.easy-forex.com