Stock vs. Forex broker: a way to make cash on trading stocks
Since early 2018, Facebook stocks have been 16.78% down and Amazon stocks, on the contrary, have risen in price by 46.59%. With a correct focus (going short for the Facebook securities and long for Amazon) investors could have earned more than 60% of annual return.
What is forex stock market and how you can make money on it, read on.
How a beginner can trade stocks with a Forex broker
Suppose, a company owner has an operating business that produces something. The owner wants to to expand production, but he does not have enough money. Then, on the basis of his enterprise, he/she creates a joint stock company. A stock or a share is a security that entitles its holder (the shareholder) to an equal claim on the company's profits and an equal obligation for the company's debts and losses. In other words, if the share capital (the value of the company) is divided into 100 shares, then one person holds 1% of all votes.
A stock exchange or a securities exchange is a platform where stock brokers and traders can buy and sell securities, being enlisted (meeting all the requirements to be registered). It is a kind of forex share trading. So, to attract investors, that company owner offers the stocks of the company on the exchange (initial public offering (IPO)), which then are openly bought and sold. The stock price depends on both internal factors (the company development) and the external ones (geopolitics, sanctions, markets).
A stock index is a group of shares that are used to give an indication of a sector, exchange or economy. Usually, a stock index is made up of a set number of the top shares (basket of shares) from a given exchange. They are both a means of generating income (when it comes to futures contracts for a particular index), and an indicator of the country's economy. They include the largest companies that form the economy of a country or industry. Stock indexes can indicate the prices in a particular sector of the economy, as well as the entire stock market in general. Compared to investments in stocks, indexes are considered less risky, since investing in an index, investor invests in all companies included in an index, diversifying risks.
Most frequent questions about trading index stocks and futures:
- What stocks are the best to trade? This is a rhetorical question. Everything depends on the trading strategy and the level of risk, chosen by the trader. In the history of trading, there are examples when some investors bought penny stocks of unknown companies, which then turned into mid-tier companies, and made profits. There are venture investment strategies, for example, investing in the stocks of biotech and pharmaceutical companies. Who prefers not to chase after profit and minimize risks, chooses indices and technology companies, for example, Apple stocks, Alphabet, Amazon, etc.
- How can I trade stocks online? There are two variants: you trade either on the stock exchange or in the over-the-counter market. Both options have their advantages and disadvantages.
- How to select companies that will yield profits? If there were an answer to this question, everybody would be a millionaire. It is important to develop your own strategy, diversify your risks, develop intuition and carry out constant complex analysis of the market situation and the company itself.
- What stock exchange is the best for stock trading? Any global stock exchange will suit; NYSE, NASDAQ, CME, TSE.
How you make money trading stocks with a Forex broker
Not only stock exchanges and stock brokers provide getting income by the changes in stock prices. Forex brokers also provide stock trading. Forex is the over-the-counter market that, unlike stock market, doesn’t have its own physical platform (that is the exchange). Simply put, trading is carried out virtually long the following line:
- A trader who wants to make money on Forex stock trading gives an order to a broker to buy or sell an asset, indicating the transaction volume (number of shares, futures, etc.).
- The broker sends the order to the external OTC market, which comprises major market participants: market makers, investment banks, funds, etc. They form the price, at which they are willing to sell / buy an asset. If the best offer (best price) matches to that, offered by the trader, the transaction is carried out, which is immediately displayed in the trader’s personal account (profile).
- Some time later, the trader gives the broker an opposite order, which is also sent to the OTC market. If there are counterparties for the price offered, the transaction is completed.
The major difference between forex and stock market is that in Forex you trade the Contracts For Difference (CFDs), without transfer of physical assets. On the stock exchange, you buy securities and manage them as you like - up to leaving as the inheritance; in Forex, you earn only on the difference between the buy and sell prices of an asset. Stock exchanges and Forex brokers provide different stock rates, because the broker can charge a commission that is the difference between an asset buying and selling price (spread).
Other differences between Forex brokers and stock exchanges:
- Number of instruments. A stock exchange, as a rule, provides a few listing options, where you can buy shares of hundreds of companies. Forex stocks, provided by forex brokers, usually include 50-100 instruments. Some people can see it as a drawback. But I should note that Forex brokers usually select the stocks of the most popular and reliable companies, performing a part of a trader’s work on the analysis of companies financial performance.
- Commission fees. In Forex, it is swap that is a fee charged for keeping your position open overnight. It is much more complex with the commissions on the stock exchanges. They can charge a fee for each trade, a depository fee, etc. Before you buy stocks with Forex broker, it makes sense to compare all associated costs.
- Financial leverage. Forex brokers offer higher leverages than stock ones. In a way, it may seem a drawback, as this way one can quickly lose the deposit. But after all nobody forces you to use it? That is why the tool will be of interest to professionals who know how to use it.
Another forex advantage is a small initial deposit, compared to the exchanges. To trade on the US stock exchanges, you need more than $1000. With a Forex broker, you can start with much smaller amounts: the minimum deposit, required by many brokers, ranges from $1 to $100. There are also cent accounts. They rather suit for training and making up your character, but the fact itself is important - you can make real money on them.
I also should mention a rebate. A rebate is a partial refund of the spread, offered by brokers to attract new clients and encourage traders to increase their trading turnover. A rebate can be provided by a broker or by a different service. This is another nice addition, which is not provided by the stock exchanges.
For the rest, forex share trading is similar to trading on the stock exchanges. Online Forex stock prices are represented on the platform charts, delays in stock transactions excluded (there is the possibility of using scalping, strategies of trading on the news according to the economic calendar).
Stock and Forex trading for beginners:
- Analyze macroeconomic indicators. Global stock markets are influenced by geopolitical events. If there is global turmoil, investors prefer to close positions and wait. Example: the US and Chinese trade wars, which sent down almost all forex stock indices.
- Analyze the industry performance and the competitors. If the industry in general faces troubles, a particular company’s stocks will hardly grow in price. Competitors’ performance is also important. If, in the same industry, one company launches a better product, investors funds flow to the leader’s stocks from other companies.
- Estimate financial statements and equity multipliers. They include EBITDA, P/E and EPS, EV and so on. Study the analysts’ forecasts for the stock prices. For example, when positive reporting is published and the performance turns out worse than it was expected, then forex stocks commodities will go down in their value. Example: the case with Facebook, whose stocks dropped down after the release of financial reporting for Q2 and Q3 2018.
- Study the situation inside the company. It is about top managers, products, developments, inside corporate conflicts and so on. All of this affects investors’ sentiment.
Let’s sum up. Stock prices, index futures and stock indexes traded with a Forex broker are a good opportunity to make money with a relatively low risk. To start stock and forex trading you need:
- Select a broker, get registered and verified (identity verification);
- Download an electronic trading platform and study its functionality;
- Choose a company you are interested in and analyze the changes in its stock price for a particular period of time. Find out patterns and regularities that draw the price in a certain direction;
- Enter a trade and monitor the price changes.
I wish you successful trading!
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
