A Few Sound Reasons Why FX Trading Is So Popular
After a wave of deleveraging in 2009, FX Trading has had its share of hiccups when the trading volumes went down drastically. Now the Forex market is back on its tracks with the global average daily volumes touching nearly USD 3 trillion.
What makes the currency market so popular? Does it have an edge over stock trading, something which most people are familiar with? The answer to this question is both yes and no. However, let us focus on the positives first. Currency market has caught the fancy of traders and investors the world over for the following good reasons.
Greater Leverage
It is a fact that FX Trading provides the greater leverage compared with the time-honored stock trading. What exactly does leverage mean? Concisely, leverage is a loan a broker provides to an investor to handle his Forex portfolio.
For example, if you want to trade USD 200,000 in currency with 1% margin you need to deposit only USD 2,000 in your margin account. This works out to a leverage of 100:1.This is significantly larger than the leverage of 2: I the stock market normally provides. However, this magnified exposure also means that FX Trading can result in losses that exceed your initial deposit.
Geographical dispersion
The currency market runs 24 hours a day and five days a week. This is a notable benefit, since round the clock trading facility allows an investor to trade in FX real time from any part of the world. Fortunately, for US traders, the timing of US markets overlap with that of Japan’s and UK’s enabling the trader a remarkable amount of flexibility.
Liquidity
A market is considered liquid if at any time there are a large number of buyers and sellers operating in the market. For example, the currency market has a daily volume of nearly USD 3 trillion. This is a clear indication of the excellent liquidity FX Trading offers.
Besides, there have been instances when the world’s most active currency exchange rates have changed up to 18,000 times on a single day. The currency market has small movements in rates with minute spreads, another hallmark of good liquidity.
Focused Choice
New York Stock Exchange has more than 3000 listed companies. This is enough to overwhelm an investor or a stock trader. Compare this with FX Trading that has just eight ‘major’ currencies to choose from. These currencies are the U.S.Dollar (USD), the Euro (EUR), the British Pound (GBP), the New Zealand Dollar (NZD), the Swiss Franc (CHF), the Japanese Yen (JPY), the Australian Dollar (AUD) and the Canadian Dollar (CAD).
However, you must conduct currency trades in pairs. Therefore, mathematically you can derive 27 pairs from the above eight currencies. Of these, 18 pairs are conventionally quoted in FX trade because of their overall liquidity. Thus, the currency market limits your focus to just 18 pairs, good enough to keep you away from umpteen distracting choices.
In addition to the ‘majors’ there are a huge range of minor currency pairs or exotics that are less heavily traded, including the AUD/EUR, AUD/NZD and GBP/JPY.
No Intermediaries
When you trade in FX, you have only the trader and the buyer or seller of the currency involved in a deal. Whereas the stock market has three entities, the trader, broker and the stock exchange, and both the latter charge you commission and fees. In contrast, FX Trading does not involve middlemen as it happens in stock trading.
Discover more about FX Trading and learn how our flexible pricing enables you to benefit from tight market spreads.
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