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Understanding the Difference between Penny Stocks and Forex Trading

Martin Castilla            No comments            Sep, 14

The hectic world of penny stocks and Forex trading is constantly evolving. This is not surprising at all, since both of these options are invaluable investment arenas for traders with limited capital budgeting. Unlike regular stocks or bond trading, penny stocks and Forex give traders the opportunity to invest a small sum of money and yet achieve a high rate of return (ROI) in a short time span.What you need to know is that both these approaches differ markedly and, as such, target different types of investors. So, here is what you need to know before you start off.

Forex Trading

Foreign Exchange, or simply Forex, is a global market where currencies are traded. With$5.1 trillion in average daily turnover in 2016, Forex has become the world’s greatest and most fluid market.

However, to reach this stage and meet the needs of the modern society, trade exchange has gone through numerous stages.In the past, it was restricted to the interbank market (a market that embraces numerous banks around the world that trade with each other) exclusively. However, the rise of the internet has changed the world of currency trading forever.With the plethora of automated trading systems and social trading tools, it has become available to the individual investors, as well.

There are numerous factors that make Forex trading widely popular and here are some of them:

  • Simple trades.Forex enables you to enter or exit a trade in just a few seconds.
  • High liquidity and low capital requirements. Compared to any other type of market, Forex has the greatest number of participants, which again enables the highest levels of liquidity. Precisely because of this, banks offer large leverage to traders, allowing them to manage substantial sums of money by making small investments. Moreover, the leverage available in Forex is one of the highest you can get. For example, in order to trade $50.000 at the minimum 50:1 leverage ratio, you need to deposit only $1.000.

Pro tip: Even though it’s a great chance for traders to increase returns, you need to keep in mind that high leverage is most commonly a double-edged sword. Put simply, if your currency trade fails, you can lose money. In order to avoid this, you need to employ stop-loss and stop-limit orders.

  • 24 hour market activities.Starting each day in Australia and ending it in the U.S., Forex markets all across the globe operate 24 hours, which influences the liquidity rates. Obviously, when market activities in multiple time zones overlap, the liquidity rates rise.

Penny Stocks

As their mere name suggests, penny stocks are defined as the stocks of the companies traded for less than $5. Similarly to Forex trading, this makes them a good solution for the investors with limited budgets, who expect large ROI. What you need to know is that this market is extremely volatile and that it provides the investors with massive ROI, which is something you cannot expect from Forex trading.

But, how reliable are penny stocks? Even though they literally give you the opportunity to get rich overnight, penny stocks are highly speculative and can result in many investors suffering heavy losses. Moreover, unlike higher-priced stocks, penny stocks usually don’t offer accurate information about the companies in which to invest and are not obliged to register with the Securities and Exchange Commission.

What you also pay attention to is the way penny stocks are traded. While some penny stocks are traded on all large markets, such as AMEX, NASDAQ or NYSE, the others are a part of the so-called dark market, such as Pink Sheets, OTXQX and OTCQB.

Still, this is something you cannot hear from some global markets news. Unlike the stocks traded on some major markets, penny stocks are completely left out from the media, which provides many scammers with an opportunity to take advantage of the investors. One such example is a, so-called, pump and dump scheme. Here, con artists buy huge amounts of stocks and then artificially inflate the stock prices through some misleading recommendations.

Obviously, penny stocks are for those who love high risk and challenges. Even if you are this sort of a gal, you cannot afford to take this market for granted. In order to avoid potential frauds, you need to invest a lot of time in doing a thorough market research.

Conclusions

Finally, each of these investment opportunities is open to the individuals with limited budgets. While penny stocks are more volatile and offer higher ROI, they also pose greater risk of failure. On the other hand, Forex is adequate for those interested in investing in a quite stable market. Now you know the advantages and disadvantages of both these market arenas, you can choose the one that will meet your needs.

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