What To Choose: Forex, Binary Options Or The Stock Market?
The answer to this difficult question is of interest to many novice traders, so we’ve decided to deal with it in our article. The stock market, binary options trading and Forex are different markets, each with its own advantages and disadvantages.
What to choose: Forex or binary options?
In the Forex market, as in options, traders receive revenue based on the difference in prices of the same financial instruments (currencies, stocks, commodities), but the methods of operationare different. In options, for generating income, you only need to determine the dynamics of the asset, using market analytics and a risk management system. By contrast, in Forex trading (truth about Forex), the following parameters are taken into account: the number of opened deals, leverage, lot size, type and size of the spread, and orders.
A binary trader earns on the dynamics of quotations (you only need to specify the dynamics UP or DOWN), while a Forex trader earns on the number of points of closed deals. If options contracts allow you to know in advance the amount of your income, then in Forex it all depends on when the transaction is going to be closed. For options trading the COLL and PUT keys would suffice, while there are more relevant keys in Forex, depending on the different types of orders used. Binary trading can bring profit up to 80% with 100% risk of loss, while Forex profit can bring 6 times more losses. Comparing these markets, we note that options trading is simpler and requires less knowledge, so more often traders first trade in options then switch to Forex. In fact, both Forex and options are available for small capital markets, but they are also characterized by increased risks, so they are very popular today.
What to choose: Forex or stock trading?
Forex, like binary options, makes it possible to earn both on the fall and on the growth of exchange rates. With the stock market, everything is more interesting. If you do not have funds, but you want to work on the stock exchange, there is an opportunity to use borrowed funds, which the stock broker is ready to provide to you to purchase the right number of shares. You can also use short sales (Short), in which unlike borrowing money from a broker, you can borrow shares, with which you can then work according to your trading strategy in the stock market.
To learn Forex and options and to trade in these markets is easier than on the stock exchange; they are more accessible to a wide range of enthusiasts due to the low entry threshold. To buy shares on the stock exchange, you will initially need greater capital. The stock market places restrictions on leverage; investors trade with low leverage or use their own funds, which makes this trading available only to wealthy investors. As we know, Forex is ready to provide a leverage of 1:100 up to 1:500. This market enables the extremely attractive prospect of obtaining a decent income with a minimum entry threshold. In the stock market, before earning a profit from the stock, the investor must buy it in exchange for his or her money. On the contrary, Forex traders trade in assets that are not available. Having acquired assets of the company, the investor becomes a co-owner of the organization, and he or she can actively participate in its management.
Forex is a volatile market; it allows you to earn more in the near future, while the stock market is focused on long-term transactions. Forex offers 24-hour trading. Traders trade day and night, when it is convenient for them, while the stock market operates within the trading session. As for the predictability of the dynamics of the market, the situation is advantageous for Forex: all events that affect the dynamics of quotations occur on schedule and traders know the list of news in advance; thus in order to obtain a good profit, it’s sufficient to be good at analysis.
The stock market works differently: the price of shares can be influenced by factors that are difficult to predict (e.g., personnel reshuffles, orders of a specific company). These are mostly microeconomic and individual reasons that one must be able to notice and anticipate. The advantage of the stock market is its stability and lower risks.
What to choose in the end? Forex trading, binary options or stock market opportunities – everyone decides for himself, because much depends on the funds the trader invests to generate a certain income. However, you can use these types of trading together; let’s see how.
Insurance of risks in the stock market
Insurance of risks in the stock market is a serious measure that will prevent you from losing. It’s worth remembering that the assets on the account of the broker are not insured. At the same time, different risks are spread on the stock exchange: non-market risks (force majors that do not depend on the market) and risks of direct losses during transactions. In order to reduce risks, choose a reliable broker in advance. One of the main tasks of the investor is the creation and following of the strategy for trading on the stock market.
A rational combining of risks and incomes, and, in many respects, a classic way to reduce risks and achieve the necessary profitability, is the competent drawing up of an investment portfolio, which includes different assets with different collateral and risks.
In addition, when it comes to reducing risks in the stock market, traders often opt for insurance companies, which are one of the main participants of the exchange. They hedge deals, which is a common thing on US stock exchanges. The cost of insurance depends on the reputation and experience of the company. Hedging is often a necessary tool to protect against risks. For more effective insurance, companies make up a hedging program, study past risks and make future forecasts.
In the stock market, insurance companies should have a professional staff, including economists, analysts, and insurance agents. Predicting risks, such companies do important work. If they make the wrong forecasts, they lose money and their reputation. Insurance of risks favorably affects the development of the securities sector as one of the highest risk types of trading and supports economic stability.
Hedging as a way to reduce risks
The strategy of hedging (from the English hedge, which means «insurance») is widely used and effective for minimizing risks in the market of binary options. The approach suggests opening transactions in one market to compensate for the impact of the price risks of an equal but opposite position in another market. Today, participants in the market of binary options are particularly active in applying hedging to transactions and opening opposite positions (UP and DOWN). Otherwise, CALL contracts (purchase) are insured by PUT contracts (sale).
Such a strategy is simple, intuitive and convenient for Internet traders of any level and experience in trading stocks; it makes the work of the market calmer, especially for those players who are not ready to risk their capital. Hedging absolutely guarantees a stable income: even if one transaction goes poorly, the second one is unprofitable.
In general, all financial markets are characterized by increased risk. To protect its funds from losses, the stock market also uses the concept of hedging, which acts as an arrangement between the two parties to buy and sell goods at a specific price in order to insure its value against possible price fluctuations. The role of hedging is difficult to underestimate; it is a reliable way to save your capital and reduce the risks of losses. The most popular type of insurance of risks, according to Wikipedia, are transactions with futures contracts for shares. Because the futures exchange is characterized by the absence of risks of agents, the contract will be executed in any case, which is guaranteed by the exchange itself. When hedging the purchases of futures, the buyer is insured against rising prices; when hedging the sale of futures, shares are insured against a possible drop in value.
Hedging can be complete or partial. Complete hedging suggests that the trader protects from risk the entire sum of the transaction by means of futures. Thus, the hedger adheres to the passive strategy, which makes it possible to conduct stable trades – but there is the risk of not obtaining a potential profit if the market starts going up. With partial hedging, which is more common today andconsidered more modern, the hedger acts more actively, dealing with its assets in parts. This strategy has several types of hedges. With cross-hedging, operations are carried out with futures that have different assets. In this case the hedger deals with those financial instruments which are currently growing in price.
With a continuous hedge, contracts are purchased for the volume of assets, which should be insured for a specific time. After contracts are executed, new futures are acquired under similar rules, etc. In the case of pre-emptive hedging, futures transactions are made before the deal is concluded. With selective, flexible hedging, you can partially insure assets.