Benefits of Currency Trading vs. Equity Trading
Historically, smaller-scale, individual investors have had limited access to the
FX market. Major banks, multinational corporations and other participants, trading
in large transaction sizes and volumes, have dominated this market for decades.
Technology (such as OANDA's unique, proprietary FXTrade Platform), however, has
lowered the barriers of entry and opened up this attractive marketplace to a new
breed of FX investors and speculators. Increasingly, FX trading is winning favor
as an alternative investment opportunity. The following are some of the benefits
of trading currencies vs. trading equities:
Continuous, 24-hour trading
The currency exchange market is a true 24-hour market. Equity trading is restricted
to the operating hours of the various equity exchanges. While after-hours trading
has become available through Electronic Communication Networks (ECNs), there
are no guarantees that the market will be liquid at all times, or that trades
will be executed at "market prices".
High liquidity and greater efficiency
Trading volume in the currency markets can be 50-100 times larger than the New
York Stock Exchange. Twenty-four hour, five day per week accessibility greatly
increases the probability of finding dealers willing to buy or sell currencies
at fair market price. Equities are more vulnerable to liquidity risks due to
limited trading volumes and market accessibility. In the less liquid equity
markets, large price movements may occur when individual transactions take place.
Intra-day volatility
Large volume and liquidity combined with fewer instruments generates greater
intra-day volatility in the currency markets than exists in the equity markets.
This volatility can be profitably exploited by day-traders.
Low spreads
Currency trading offers spreads that are much lower than what can be obtained
when buying or selling equities (especially in after-hour markets). Although
the tight currency spreads of 5 pips historically have only been available for
transaction sizes of $1M or higher, a shift towards offering these tighter spreads
for smaller transaction sizes is occurring. FXTrade offers these types of tight
spreads regardless of size.
Leverage
Typically, margin ratios associated with trading currencies are higher than
those associated with trading equities. This is primarily attributed to the
higher levels of liquidity within the currency markets. Margin trading allows
FX market participants to trade much larger amounts than they have deposited.
For example, with a margin ratio of 20:1 and a deposit of $10,000, an investor/speculator
can trade amounts up to $200,000. Trading in larger volumes, in turn, allows
these investors/speculators to take better advantage of small price movements.
Profit potential regardless of market direction
By definition, an investor with an open position is long one currency and short
another. If a trader believes a currency is about to depreciate, he/she sells
that currency short and goes long another currency. In the currency markets,
selling or shorting is a necessary component of completing a trade. Profit potential
exists in the FX market regardless of whether a trader is buying or selling
and regardless of whether the market is moving up or down. In the U.S equity
markets, short-selling is less common and more difficult to transact due to
certain market rules and regulations. This makes it more difficult to profit
when the stock market and/or the share price for a particular stock begins to
head south.
No commissions or transaction costs
A currency transaction typically incurs no commission or transaction fee outside
of the quoted spread. This is in stark contrast to the equity market, where
commissions for stock trades range from $8 to $70 and higher in addition to
the quoted spread.
