If you are interested in trading currencies online, you will find that the Forex market offers several advantages over equities trading.
24-Hour Trading. A true 24-hour market, Forex offers a major advantage over the limited hours of equity trading. Whether it's 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading foreign currencies. Traders can respond to breaking news immediately and P&L is not affected by after-ours earning reports or analyst conference calls.
Superior Liquidity. FX boasts a daily trading volume that is 50x larger than the New York Stock Exchange, so there are always broker/dealers willing to buy or sell currencies. The significant liquidity of this market helps ensure price stability, especially for the major currencies.
Greater Buying Power. The leverage offered by most FX dealers substantially exceeds the common 2:1 margin available in equity trading. At 100:1, traders can post $1000 margin for a $100,000 position, or 1%. While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful moneymaking tool. Rather than merely loading up on risk, as many people incorrectly assume, leverage is essential in the Forex market because the average daily percentage move of a major currency is less than 1% (a stock can easily have a 10% price move on any given day).
Lower Transaction Costs. It is much more cost-efficient to trade Forex in terms of both commissions and transaction fees. FOREX.com, for example, charges no commissions or fees, while still offering traders access to all relevant market information and trading tools. In contrast, commissions for online stock trades range from $7.95-$29.95 per trade and up to $100 or more per trade with full service brokers.
Another important point to consider is the width of the bid/ask spread. Regardless of deal size, forex dealing spreads are normally 3-4 pips (a pip is .0001 US cents) in the major currencies. In general, the width of the spread in a forex transaction is less than 1/10 that of a stock transaction, which could include a .125 (1/8) wide spread.
Profit Potential In Both Rising And Falling Markets. In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that profit potential exists in a rising as well as a falling market.
The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero Uptick rule, which prevents investors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sale.
