Asking which is riskier, stock trading or forex trading is almost always going to invite the answer ‘It depends.’ Many factors are influencing which direction to follow.
Stock Trading vs. Forex Trading
On a superficial level, trading in forex is always going to seem like the ‘riskier’ option
. In that, it depends upon taking short term decisions and attempting to profit from quick and often quite small movements in the relative strength of different currency pairs.
Trading in stocks, on the other hand, involves taking a longer-term view of the stability and worth of a specific company or basket of companies.
Comparing the two isn’t merely a question of contrasting the risk factors inherent in each. It is about weighing up the pros and cons of the two different types of trading. Plus, deciding which kind of risk is more suited to your trading style and your ambitions.
No matter the type of trading you finally follow. The best advice is to do your research before putting any of your actual capital on the line.
This is the meaning of Stock Trading
In the case of stock trading
, this will mean looking exceptionally carefully into the stocks which you’re thinking of investing. Not only will you need to examine the history, recent performance, and plans of the individual company in question. You will also have to take a more strategic, longer-term view of the industry in which it plays a part.
Most stock investment in the long term in nature and depends upon the assumption that the stock market delivers a consistent rate of return.
Taken such thing as an average when trading stocks generate returns of 7%-10%
per year. Still, this figure assumes the trader in question has adopted an efficient trading strategy. Only 7%-10% of average earnings based on long term trends. It takes into account the fact that in some years – 2008 being a notable recent example – the value of the FTSE 100 across the board can slump dramatically.
The figure also assumes that a trader reinvests a percentage of any dividends they receive. That panic selling doesn’t take place during periods of downward movement.
The truth of the matter for many traders
If they haven’t taken the time to develop a coherent long-term strategy. They often adopt a policy of investing heavily when the market is moving upward and then selling in a panic when a downward shift occurs.
Individual traders also tend to invest in companies or sectors in which they have a particular personal interest, rather than diversifying across a range of options.
The other aspect, which plays a vital role in successful stock trading, Represent the ability to take a long-term view of geo-political or even societal changes — current investment decisions. For example, we need to take account of the fact that the most significant effect on global economic growth during the next 30 years is expected to be the impact of climate change
Many forecast regarding the effect which climate change will have on the global economy over the coming years based upon the assumption that the adverse effects will heavily outweigh anything positive.
In contrast to this, however, investments in the green and renewable energy sectors are almost bound to perform exceptionally well. As the extent of any climate emergency becomes evident, and more action takes place.
This situation represents just one example. Still, it helps to illustrate how the risk factor inherent when trading stocks and shares. It becomes hugely influenced by the degree to which a trader has been willing to do their homework.
The pros of stock trading
The sheer number of stocks available
– there are thousands of shares available to invest. While this may seem somewhat overwhelming to the individual trader trying to make a choice. It also means that it is simpler to diversify across sectors. Mixing those that move in a cyclical or seasonal nature with those that perform in a steadier, long term manner.
Relative low volatility
– the relatively stable nature of many stocks – particularly those of larger companies – means that the market is generally an excellent place to learn the ropes of trading.
– because it takes place via marketplaces such as the London Stock Exchange. Trading in stocks
is highly regulated and therefore regarded as a safer option that trading forex over the counter.
The cons of stock trading
– some smaller stocks can sometimes have more reduced cash, making them harder to buy and raising the initial cost.
– the fees for trading stocks can be higher than other types of trading. As the need to cover the costs of a broker has to be factored in.
What does it mean trading Forex?
Trading the forex markets over the stock markets represents the shorter-term trading.
As with trading stocks, reducing the risks involved depends upon taking the time to study the currencies pairs you wish to trade. And noting the economic, political, and societal changes which might cause a currency to strengthen or weaken.
The obvious example to give in the current climate is the impact that Brexit is having
on the value of the pound. In particular, the fact that any statements indicating a shift toward a no-deal Brexit tend to send the pound plummeting against the dollar and the euro.
A smart forex trader may note that a particular cabinet minister is giving an interview today. That might be an opportunity for setting up some positions based on the assumption that the minister is going to re-affirm the government commitment to no-deal Brexit preparations.
Which are the risks of Forex Trading?
The dangers of forex trading tend to center upon the volatility of the markets and the fact that this volatility sometimes makes it difficult for a trader to close a trade exactly when they would like to.
The other significant risk factor is the leverage involved in forex trading. This risk means investing a particular amount and then multiply the purchasing power of that capital. For example, a trader with a wealth of £500 could get offered leverage of 30:1. This might enable them to take up positions which multiply £500 by 30 to create £15,000.
This offer instantly opens up the possibility of far higher profits. Still, at the same time, it ratchets up the possible losses.
One of the critical factors which mitigate any risk inherent in forex trading is that retail traders can shop around for the broker of their choice
. They can select one offering a free demo for traders. For them to develop their strategy and technique before risking their capital on the line.
Can you see it now? Deciding base on ‘risk’ applied to different types of trading? That is far more complicated than merely saying one is riskier than others. The risk which any individual trader is facing will depend upon the trading strategy they adopt.
The key to successful trading lies in learning – through a combination of study and experience – how to handle that risk.