Picture the scene; you’re new to the concept of financial market trading, but have absolutely no idea about where to start your journey. So, do you target the $6.6 trillion-per day forex market, or a global stock market that boasted a total market capitalisation of $70.75 trillion as of 2019.
Of course, you could also trade shares and equities through indices, which are effectively groupings of assets that represent a specific sector within a particular marketplace.
In this post, we’ll appraise the core differences between trading stocks, indices and forex, while asking which option may be the best one for you?
Trading Stocks – The Key Considerations
Typically, stocks and shares of companies represent ownership equity in particular businesses, while they’re usually owned directly by investors as a secure store of wealth.
Returns are subsequently paid through either capital gains or dividends that are drawn directly from the company’s earnings, with this asset class one of the most popular and accessible in the world.
In general terms, stocks are thought to offer relatively stable and low-risk options to traders, especially the blue-chip equities commonly associated with dividend investments. However, that isn’t to say that there’s no risk at all, as company shares remain vulnerable to multiple macroeconomic and strategic factors that can devalue your stock holdings over time.
This is particularly true in the current climate, where shares in markets such as retail, aviation and tourism have flatlined as a result of the coronavirus pandemic. So, it’s more crucial than ever that you start out small and look to scale your efforts in line with profitability and experience, primarily by purchasing smaller test amounts of stocks first.
Getting Started With Indices
As we’ve already touched on, indices represent the value of a grouping of assets or stocks that are listed on a particular exchange.
In some respects, indices are a little harder to access than individual stocks (as they often can’t be accessed directly), which is why you need to find a reputable broker such as Oanda to trade indices effectively.
Prominent indices include the FTSE 100 in the UK, along with global entities such as the Dow Jones, S&P 500 and Nasdaq in the US. The FTSE 100 represents the 100 largest equities traded on the London stock exchange, with the price of this index fluctuating in line with the performance of the individual shares included.
One advantage of trading indices is that you’ll be able to spread your risk and immediately diversify your portfolio, while simultaneously targeting small and mid-cap stocks (in some instances) that offer the potential for far greater long-term gains.
Interestingly, indices also offer you access to a handful of derivative investment vehicles, including CFDs and Futures. In these instances, you can effectively speculate on and trade stocks without assuming ownership of the underlying asset, creating the potential to secure greater flexibility and improved short-term gains.
What About Forex?
We close with forex trading, which is characterised by huge daily trading volumes and significant levels of volatility and leverage.
This market sees currency pairings traded and exchanged in real-time, with significant price movements commonly recorded every single day.
Currencies can be traded as derivatives assets, which once again means that you don’t need to own the underlying financial instruments. As a result, you can speculate on the performance of specific currencies and potential profit even in a depreciating marketplace, while the margin-based nature of the market can lead to disproportionately high returns.
It can also cause you to lose more than your initial deposit, however, while currencies are also subject to a huge range of macroeconomic and geopolitical factors on a daily basis.
Ultimately, this represents one of the most rewarding but simultaneously high-risk marketplaces, and one that requires you to start small and ideally by trading just one or two currency pairings.
