Investing is a smart way to grow your hard-earned money. People invest in different ways to expand their wealth. Some prefer buying real estate properties and starting their own business. Others, meanwhile, like to invest in the stock market. Each investment offers different results and presents unique risks.
Another way investors make extra money is through the foreign exchange market, also known as Forex. It is a global marketplace where people trade currencies. Forex transactions are often conducted when you travel abroad. If your travel to the UK from the US, you have to exchange your US dollar for the pound sterling.
Although Forex transactions are mostly for practical purposes, they can also be used to earn a profit.
How Does The Forex Market Work?
What makes foreign exchange unique is that it has no central marketplace. Forex tradings happen via the over-the-counter (OTC) market. Traders around the world are connected through computer networks instead of having one central location. This is why the market is open 24 hours a day, five and a half days a week.
You can trade currencies worldwide through trading centers in four major financial centers of New York, London, Tokyo, and Sydney. When the trading day in the US ends, the forex market begins at other timezones. That’s why the market can be active any time of the day while prices change.
Currencies are traded in pairs. Traders need to learn how to read currency pairs to help them succeed in the forex market. A currency pair refers to a price quote of two different currencies. The first currency is the base currency, while the second one is the quote currency. Each currency is written in a three-letter alphabetic code or the International Organization for Standardization (ISO) currency code. The ISO code US dollar, for example, is USD.
Traders should also be familiar with the types of currency pairs. They are divided into three categories to keep things in order.
1. Major Pairs
They always pair USD with another major economy because it is the global reserve currency. This allows any country, regardless of its currency, to trade with the U.S. dollar. These pairs are also highly liquid and stable, making them ideal for trading. The major pairs include GBP/USD, EUR/USD, and USD/JPY.
2. Minor Pairs
These pairs involve major currencies against each other but don’t feature USD. They are less frequently traded compared to major pairs. Minor pairs include EUR/CHF, EUR/GBP, and GBP/JPY.
3. Exotic Pairs
This currency pair features a country with an emerging economy and pair it against the US dollar or other major countries. These pairs include USD/PLN, EUR/CZK, and GBP/MXN.
Predicting exchange rates can be difficult for traders since several factors affect the price movements. It’s vital to understand the things that drive price fluctuations.
Forex vs. Stock Trading: Which Is A Better Investment?
The stock market is another trading instrument that allows you to earn profit. Unlike forex, a stock is a form of investment where you own a share in a company. When the stock’s value increases, you can sell it at a higher price than you bought it.
Forex and stocks are popular global markets among traders and investors. Choosing where to trade can be complicated. It would depend on what you want to trade, be it currencies or company shares.
The forex market attracts many traders due to its high liquidity and 24-hour trading hours. Stocks, however, offer steady growth potential to your portfolio, especially if you’re investing in blue-chip companies.
Many traders prefer forex trading over stock trading because of its leverage. In forex trading, you need to open a forex trading account to qualify to trade with leverage. The forex market offers up to 50:1 leverage in the US. Other countries provide higher forex leverage.
In stock trading, meanwhile, investors have access to 2:1 leverage. Day traders who have an account balance of over $25,000 can trade up to 4:1 leverage when they open and close their positions within a single day. Not all investors are also approved for a margin account, which is essential to leverage in the stock market.
Apart from leverage, other differences between the two markets include liquidity, price sensitivity, and market accessibility. The forex market is more accessible than the stock market because it has many trading centers worldwide.
Investing your money requires extensive research to understand the market where you want to trade. At the end of the day, you need to choose a market you’re most familiar with and where you’re most comfortable. If possible, you invest your money in both markets to diversify your wealth portfolio.