Pick your Poison: Stocks, Indices or Forex Trade

(eToro Blog) Today’s traders have a slew of investment opportunities to choose from among, from blue chip shares to indices to foreign exchange. Choosing which market (or markets) you want to invest your hard earned money in depends on several factors, not the least of which is your preferred trading style and risk tolerance, but also the volatility of the market, typical market hours, and leverage.

The Stock Market

Investors who prefer a buy-and-hold strategy typically have a lower tolerance for risk and are generally best suited for equity trade, i.e. stocks. Blue chips are considered the crème de la crème of stocks, and come from financially sound, well-established corporations. Even during challenging economic times, blue chips generally are able to profitably operate and regularly pay out a dividend. In general, blue chip stocks are less volatile than non-blue chips and certainly less than most other investments. Given that, blue chips are often included among the buy-and-hold strategists, while non-blue chip shares can go either way. A stock exchange’s open hours generally dictates a trader’s timetable, though stocks are traded globally on dozens of exchanges from Tokyo and Sydney, on through Europe and London, then to New York. Investors in the U.S. may be able to obtain leverage for stock purchases at 2:1 ratio.

Besides individual stocks, investors can trade a stock index, which is a composite of blue-chip stocks and which is often viewed as a benchmark for the broader market. Traders can trade all three of Wall Street’s key indices, i.e. the DJ30, the SPX500 and the NSDQ100 as well as the benchmark indices from London (FTSE100), Frankfurt (DAX) and Paris (CAC-40).

The Forex Market

Short-term traders by nature accept more risk, and typically prefer a market where price volatility might be more pronounced, such as the currency market. The currency market is the financial world’s largest, with an average $4 trillion traded each day. For many traders, the high liquidity, face pace and 24/7 access is enough attraction, while others are attracted to the leverage inherent in foreign exchange. Depending on the broker, a trader can obtain leverage of 50:1 or even 100:1. Currency pairs are traded on an almost around-the-clock basis, with weekly trade beginning in Sydney, Australia (5:00 p.m. in New York) and ending the following Friday afternoon in New York.

A trader’s decision to trade forex or stocks or indices is based primarily on tolerance for risk, account size, availability of leverage and convenience. Stocks might not be the best option for an active investor who is unable to trade during market hours, but if the investor’s strategy is one of buy-and-hold, then stocks could be a good fit. On the other hand a trader who doesn’t keep “regular market hours” might prefer the 24/7 option that the forex markets afford.

It all boils down to the best fit and many traders like to experiment until they find the best fit and right mix or allocation of their funds. In some cases the best fit might be a combination of markets, and in that case it’s important to find a broker (like eToro) who can allow you to have the best of all markets, simultaneously.

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