Active Investors and Traders
The concept of buy and hold type of investment in stocks is followed by passive traders. The new breed of active investors and traders have a large number of trading instruments, access to global equities and unprecedented level of knowledge base available at their disposal. Traders are no longer thinking in terms of just buying stocks for selling at a higher price later. They are exploring other means to buy and sell stocks, indices and the futures and options (F&O) which offers them higher reward potential. With the stock trader looking for more trading opportunities, the transition into Forex trading is natural and with the right strategy may be more lucrative than trading or investing in stocks or F&O.
The Forex market is the largest in terms of trading volume and offers maximum liquidity. It easy to enter and exit a position in any of the major currencies within a fraction of a second for a small spread in most market conditions.
Financial Institutions and large banks are the major players. They have access to excellent infrastructure, knowledge, real-time information and data to be successful in trading. Over the past decade, many retail traders have been attracted to Forex market due to its high liquidity, 24 hours trading and the high leverage offered by Forex brokers.
Risk tolerance and trading style may be the most crucial aspect when it comes to defining an investor or trader. Buy and Hold investors will prefer the value and safety offered by stocks – they have a very long term outlook, typically ranging from three years to several decades. Investors with shorter term goals are traders who will find swing trading, day trading or scalping very attractive depending in the time they are able to allocate for trading. Traders generally prefer volatility – Investors prefer low volatility.
Leverage is one of the most important and crucial factors in determining if a investor or trader wants to trade stocks or Forex. With Forex trading leverage of 1:20 to 1:500 is possible depending on the country of residence of the trader. With stocks, the leverage is largely limited to 1:1 or 1:2 in most cases. The idea of making large gains on a smaller capital is what attracts most traders to Forex market.
The basic difference between stocks and Forex trading is that the value of the stock may rise or fall – the chances of the investment made in a stock becoming zero is rare and may only happen in case of the company getting bankrupt. With Forex, the chances of losing the investment made in a trading pair is higher – this is largely due to the leverage. With stocks, the trader owns a stock which can be held for longer periods and sold at a profit or loss at later date. In the case of Forex, the trader only opens a position against a currency. There is no ownership of the currency or underlying instrument. The movement of the currency is dictated by the macro economic fundamentals in the long term.