Whenever a trading style is to be tested or compared, the benchmark has to be share dealing. Usually completely unleveraged, share dealing represents the birthplace of all modern trading, and a basis on which many forms of trading are still based. For example, a large number of derivatives’ transactions draw roots from underlying shares in listed companies. The involvements of the stock markets in delivering long term, lower risk returns to pension funds and insurers and banks is central to the global economy, as is the capital the markets provide to those companies engaging in them. Yet for speculators, respect and nostalgia mean nothing, and the ability to trade in the forex markets for significant increased returns has naturally made it a more popular venue for a new generation of traders.
Round 1: Leverage
Leverage is a foreign concept as far as more share traders are concerned. For the most part, those engaging in the stock markets will do so on the basis of a 1:1 investment ratio – that is $1 worth of investment for every $1 of capital they deploy. Obviously, this is in stark contrast to forex which can provide up to 500:1, which quite simply allows the forex trader to earn more money in the short term. That being said, share trading is without the risks associated with leverage, and thereby presents an arguably more stable long-term investment prospect.
Round 2: Research
There are tens of thousands of shares you can trade. There are dozens of international markets to consider. There are countless hundreds and even possibly thousands of variables that are factoring in to the markets and how they are moving. In an environment where being the expert really counts, this makes share trading difficult to manage – from a purely practical point of view. How can you be sure you’re identifying the best opportunities, and furthermore are you considering all the different variables that could be supporting or suppressing your chose position? With forex trading, the field of research and required knowledge is much more limited. That’s not to say you don’t need to be an expert and try to become familiar with often complex concepts – you do, but the scope of the research involved is much narrower with forex trading than with share dealing.
Round 3: Barriers To Entry
Finally, the high degrees of leverage in forex trading mean its possible to buy moderate amounts of currency with a very small capital investment. Contrastingly, for those traders looking to invest in shares, you need to be looking at many thousands in tradable capital if you want to replace the day job. The barriers to entry for forex traders are so low that virtually anyone can get involved, and while it is recommended that you have some capital built up before you get started, it is possible to commence trading with very little in the way of investment capital.
Share dealing will forever have its place in investment. Companies have long term value that people will always want to be a part of, and short-term investors will always jump in to make money on price speculation and take advantage of these ongoing demand and supply factors. Similarly, forex won’t disappear any time soon. Both trade completely different asset types, and in that respect are both better suited to their own spheres of interest. Having said that, for the trader looking for greater returns over a shorter period, forex definitely has the edge. Quite simply, there is the capacity to increase your capital at a quicker rate with forex trading that share dealing, primarily because of the substantial amounts of leverage involved.