Small Investor Dilemma - Forex Or Stocks?

If you had a limited amount of capital to invest, would you invest it in the foreign exchange (FOREX) or the stock market? This is a question that is, undoubtedly, pondered daily by small potential investors worldwide. In the ideal world, there should be a well-balanced portfolio including stocks, FOREX and other types of asset holdings. However, due to limited capital and the real need to start somewhere, the investor may not be able to immediately diversify. Incidentally, the investor could seek out some sort of diversified mutual fund, leaving all the ultimate control and decision-making to a fund manager. Nevertheless, for the small investor who wants to maintain full control and decision-making capacity over trading decisions, both the FOREX and the stock market offer such opportunity.

How does one decide which avenue to pursue, FOREX or stocks? Naturally, some sort of meaningful analysis needs to precede any decision on the matter. One approach would be to weigh the advantages and disadvantages of each. Let’s first look at the advantages and disadvantages of the stock market.

Advantages:
1. It is a regulated market; traders have more protection, generally speaking;
2. Some brokers have in-house researchers to help with trade recommendations;
3. A company would have to be virtually defunct for the stock to be totally worthless;
4. The retail market is well-established and has been around a long time; and,
5. The stock market has a greater abundance of books written about it; and,
6. Stocks may (or may not) pay out dividends, according to the vote of the Board;
Disadvantages:
1. Does not offer great leverage, comparatively speaking;
2. Not as volatile as FOREX, and, thus, lacks better potential for short-term profits;
3. There are thousands of stocks to be researched before deciding on the right stock;
4. Generally requires more capital due to the relatively high per share cost; and,
5. Margin calls may occur more frequently due to lower leverage; and,
6. Limited trading hours, compared to the FOREX.

By comparison, the advantages and disadvantages of FOREX trading are as follows:

Advantages:
1. High leverage is possible, in some cases up to an incredible 400:1;
2. There is a low barrier to entry, with some brokers allowing margin as low as $1.00;
3. Extreme volatility in FOREX makes for great short-term profits;
4. Only few dozen currency pairs are available for trading, making choosing easier;
5. Largest market size of any financial market, moving almost $2.0 trillion daily;
6. It offers 24/7 trading, closing only from 4:00 p.m. Friday to 4:00 p.m. Sunday; and,
7. Pays above-bank interest on margin funds, even when no trading is being done.
Disadvantages:
1 High leverage can result in substantial losses, if leverage is not used properly;
2 Because it is an unregulated market, some brokers may take advantage of traders;
3 The retail side is relatively new, so there are not as many well-written resource materials.
4. There is substantial risk involved and one can literally lose all of their investment in one trade.

After viewing the advantages and disadvantages highlighted above, this writer is of the opinion that the FOREX offers the best opportunities for profitability both long and short term. Of course, the underlying assumption here is that a profitable trader, prior to getting involved, will obtain the necessary education and learn strategies for properly managing risks while achieving profitability. To do otherwise would be courting financial disaster.

Starting with a relatively small amount of risk capital, such as $300, a trader in the FOREX, using proper money management techniques, can theoretically build a substantial nest egg by compounding the profits consistently over a period of time. Albert Einstein once commented that compounding is the greatest force in the universe. Whether or not that is true, it is readily apparent through mathematical computation that compounding can lead to the amassing of large amounts over a rather short period of time. Test this conclusion for yourself on paper by starting with $200 and compounding returns of 10% per month for 24 months. The results may astound you.

In conclusion, it would take substantially longer to accomplish the same financial results in the stock market as it would in the FOREX under the same economic circumstances and with the same amount of limited capital. Such likelihood would seem to favor investing in the FOREX, given a choice. As would any prudent investor, diversify your portfolio as soon as you are in a position to do so.