If you’re an investor, whether you’re managing daily trades or simply keeping track of a long-term portfolio, odds are the bulk of your assets are tied up in stocks. Indeed the most traditional ways to invest are to open an account through a broker and make your own trades or buy into a mutual fund to effectively have your money traded for you. But plenty of investors also seek out alternative ways to grow their funds, either for the sake of diversifying their portfolios or in the interest of avoiding the stock market altogether. One such alternative that’s popular with many people across the globe is the FOREX market, and in this post I’m going to discuss why it is that some favor this market.
For starters, what exactly is the FOREX market? Well, a lot of people know the term “FOREX” as having to do with currency, and that’s precisely where this market is focused. More specifically, FOREX trading means buying and selling currencies against their international counterparts to take advantage of inflation and deflation. For instance, an investor might use U.S. dollars to buy up euros in the hopes that the euro will then appreciate in value relative to the dollar. Then the euros can be converted back to more U.S. dollars than the investor started out with. Really, it’s no different than an ordinary investment: you’re purchasing an asset in the hopes that it gains value and you can cash out on that value.
While the basic trading concept is familiar, the overall environment of the FOREX market differs drastically from traditional stock exchanges, and some traders see perks and benefits in this environment. The most frequently cited benefit is that FOREX offers a huge market size, with high liquidity and trading volume throughout the day and night. More money changes hands through FOREX trades in a given day than in all the world’s stock markets combined. The fact that every major world currency can be traded means there’s always activity (regardless of stock exchange hours). All of this can make the market somewhat intimidating, but it also constitutes an advantage in that any transaction you may wish to make is possible, and usually instantaneous. With so much volume and movement, you’re exceedingly unlikely to find yourself in a position in which a trade is unavailable (or no one’s
willing to buy the currency you’re trying to sell). This can make the investing process a little bit more fluid and reliable, particularly for those who wish to be hands-on about their trades.
It might sound a little bit strange to hear that there’s so much volume in this market given that it’s viewed by many as an “alternative” investment. When it comes down to it, the need to exchange currencies is the primary reason that the market is so massive, as this exchange is necessary all over the world whether or not it’s done specifically from an investing standpoint. And naturally the massive, constant exchange takes place primarily between the biggest and most influential currencies, which brings us to another perceived benefit of FOREX trading.
Simply put, the low number of major currency pairs makes trading simpler. Because eight major currency pairs account for over 70% of the total volume of the FOREX market, there just isn’t that much for traders to keep track of despite the incredibly high liquidity. Of course, due diligence is still required in tracking these pairs and the factors that influence them if sound investments are to be made. But there just aren’t that many assets to consider when planning your portfolio. To an extent, it’s as if a stock exchange hosting a massive volume of trades consisted of only eight different stocks. That sort of clarity and simplicity appeals to a lot of traders who try FOREX, though it doesn’t necessarily make profits any likelier.
There’s one more significant factor that makes FOREX trading appealing: there are low transaction fees and no commissions. If you’ve managed your own portfolio in a stock market environment, you’ve surely realized by now that it’s not as simple as depositing money and buying up stocks. There are fees and commissions due, with brokers taking a piece of your investment and each trade costing a little bit of money just to be processed. These costs are essentially eliminated in FOREX. While that’s not a reason to dive into the market if you aren’t otherwise prepared for it, it’s certainly a nice perk for those considering currency trading anyway.
In a broad sense, FOREX can’t be declared to be any easier or harder than other types of investment. Every type of investment carries risk, and this is no exception. But for the reasons stated above, many ultimately find that it’s at the very least a comfortable atmosphere for trading when compared to others.