Forex vs. Equities

24-Hour Forex Trading

Forex is truly a 24-hour-market. Regardless of an investor′s particular time zone, buyers and sellers are actively trading currencies in a liquid market. Unlike equities, currency trading is not susceptible to corporate earnings announcements and the subsequent analyst conference calls. Currencies are also not halted due to breaking news or order imbalances.

Superior Liquidity

With average daily currency turnover in excess of $3 trillion Forex daily trading volume is 50 times larger than the New York Stock Exchange. The liquidity of the Forex market helps ensure tighter spreads, price stability and increased opportunity to enter and exit positions at a fair market price than other exchange traded markets.

Increased Leverage in Forex Trading

Compared to the standard 2:1 leverage found in the equity markets the substantial leverage available in Forex (100:1) can be a powerful profit generating tool. Although increased leverage increases the risk of losses as well as gains, the use of leverage is essential in Forex due to the low volatility of daily price moves. For example, the average daily percentage move of a major currency is less than 1% versus the daily percentage move of an individual equity of 10% or greater.

Forex Spot Market Cost Limited to the Spread - No Additional Commissions

It is much more cost efficient to trade Forex in terms of commissions and transaction fees compared to the equity markets. With Forex, the investor deals directly with the market maker in a purely electronic online transaction. Trading on a "fixed spread" based platform eliminates additional commission costs and exchange fees. Equity brokers may advertise low commissions, but this is offset when adverse market conditions and liquidity issues result in widening spreads. Forex′s 24-hour trading and superior liquidity conditions result in tighter, more consistent and fully transparent spreads leading to lower trading costs.

Equal Profit Potential in Both Rising and Falling Markets

Equity markets may have rules such as the uptick rule that govern the ability to short stocks. The uptick rule states that a stock cannot be sold short unless the prior trade was equal to or lower than the price of the short sale. With currency trading there is no structural bias to the market. Every open position is long one currency and short the other. The ability to open a currency pair position to profit from a depreciating currency without limitations is a distinct advantage over equity trading.

Eligible for Favored 60/40 Tax Status

Currency investors may elect out of IRC section 988 for the more beneficial IRC section 1256. This allows investors to split their capital gains between 60% long term and 40% short term. With the top Federal Income Tax Bracket of 35% on regular income and 15% on capital gains, the current maximum blended rate of 60/40 tax treatment is 23%.

IRC section 988 is the default election for cash Forex and provides that fluctuations in exchange rates should be treated as ordinary income or loss. The decision to elect out of IRC section 988 must be made in advance of the trades and filed "internally". This means the investor will keep the election in his or her records as opposed to filing it with the IRS.

This information is for educational purposes only and should not be construed as tax or investment advice of any kind. Please consult with your tax professional for further clarification.

Forex Allows Investors to Earn Profits on Interest Rate News and Political Turmoil

Interest rates have a direct impact on an investor′s bond portfolio, loan/mortgage obligations and money market accounts. Any significant news regarding rates also has a direct impact on the international financial marketplace. Historically, when a country raises its interest rate its currency would strengthen relative to other countries as investors shift assets in pursuit of greater returns. The growth in equity markets has changed this equation as rising interest rates, especially in response to rising inflation, tend to have a negative impact on the country′s equity market. This leads investors to allocate out of the equity market subsequently weakening the country′s currency. Determining which effect will dominate the currency markets is difficult. Investors who allocate a portion of their portfolio to a professional manager specializing in Forex gain an additional opportunity to earn profits and further diversify their existing traditional equity and fixed income holdings.

Many investors have strong opinions regarding a political administration and its trade policy, fiscal and monetary policies and domestic and foreign policy. The result of all these political factors and current events are played out every day in the Forex market and offer a tremendous opportunity for the sophisticated investor.