The Foreign Exchange Market, the New York Stock Exchange and the National Association of Securities Dealers Automated Quotations are three prevalent avenues to invest one’s wealth. Each of these markets has their own advantages as well as disadvantages. In short, the benefits of the NYSE and NASDAQ include diversification, long-term investment gains and ease of investing. The benefits of Forex include liquidity, tight spreads and leveraging.
NYSE/ NASDAQ Advantages
The New York Stock Exchange is home to over 2,800 publicly traded companies where almost 1.5 billion shares are traded daily. The NASDAQ contains over 3,100 publicly trades companies and sees over 2 billion shares traded daily. The foreign exchange market offers less than 100 pairs to trade and many brokers will only facilitate trades for a fraction of the available pairs. Since there is less volatility in the U.S. stock market and a general absence of leveraging, there is a relatively low risk when it comes to investing for the long term. In addition to long-term gains of the stock one invests in, there is also the chance to earn dividends from preferred and common shares.
When it comes to trading information, the U.S. stock market is the way to go. Reports and news heavily influence the market and investor sentiment. Since the market is only open for a few hours a day, 5 days a week, there exists a constant cycle of “gapping” share prices due to overnight news. This is normal and shouldn’t worry you, Additionally, the stock market returns an average of 9.8.% a year, which is why it is a popular investment vehicle. There is risk involved of course, but If one does their proper due diligence, they can diversify away any unsystematic risk.
The Forex markets see a daily volume of approximately 5.3 trillion USD compared to the approximate 28 billion USD traded daily in the NYSE. Volatility is significantly greater in the Forex markets contrary to the NYSE/ NASDAQ. Trades are executed almost instantaneously and since there is a large trading volume, there are commission free brokers with tight spreads. One simply cannot corner the Forex market as seen in stock market boiler rooms because of the immense volume that is being traded daily.
Due to the nature of Forex being a 24/5 market, there is more seamless prices compared to the NYSE & NASDAQ. This leads to many self-proclaimed day traders trying to find ways to capitalize on the price movements within the foreign exchange markets. The most useful tool available in the Foreign Exchange market is leveraging. However, leverage is a double-edged sword so use it with caution. Brokers in the United States are only permitted to offer 50:1 leverage, but globally there exists brokers who offer 1000:1 leverage. If one uses proper risk management they will find that they will never need more than 100:1 or even 200:1 leverage. For those who do not know what leverage is, if I had $1,000 and my broker gave me 100:1 leverage, I would have the power to trade up to $100,000.