loader2
Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

Is currency trading better than stock trading?

03:00 18 May 2022 0 COMMENT

Currency is one of asset classes along with equities, bonds, and currencies. Currency trading is the second largest financial instrument in the world after interest rates because of its wide usage for international transaction.  When it comes to selection of asset class, you might be confused which one to choose; stocks, commodities, bonds, or currencies/forex. When we list the financial instrument in the descending order, the first comes interest rates followed by currency, stock, and commodities. Since the inception of currency derivatives trading in 2008 for Futures and 2010 for options, this segment grown enormously making it one of the most sought investment tools. In this article, you will get a detailed understanding on is currency trading better than stock tracking. 

Since currency trading and stock trading are components of the financial market, it is very important to for an investor to understand that trading in the foreign exchange market is substantially different from trading in the stock market. Forex trading is concerned with the purchase and sale of international currencies, stock trading is concerned with the purchase and sale of shares in various companies. Currency futures contracts are smaller in comparison to index futures, stock futures, and commodity futures, enticing many retail investors to begin their financial market adventure.

Distinction between forex trading and stock trading

Parameters

Currency Trading 

Stock Trading

Price driving factors

Inflation, GDP growth, currency account deficit, balance of payment, Government debt, interest rate etc.

Corporate earnings, balance sheet, profit and loss account, cash flow statement, company’s vision and mission, management credibility etc.

Liquidity

Most liquid

Most liquid

Trade timings

9.00 AM - 5.00 PM

9.15 AM - 3.30 PM

Leverage

Very High 

High

Volatility

Extreme

Moderate

Why the retail investor to choose currency trading over stock trading?

Currency trading is gaining popularity amongst retail investors in India because of various reasons. Let us see the advantages of trading in currency. 

Fewer products: When it comes stock trading, you will many more companies available for trading in various segments such as BFSI (Banking, Financial Services, and Insurance), FMCG, infrastructure etc. and in currencies, we are having fewer instruments such as USDINR, EURINR, GBPINR and JPYINR. It is easy for a retail trader to keep track on fewer instruments than ocean of stocks available for trading. When it comes to tracking the equity market movement, it is more predominantly on performance of the company in terms of their balance sheet, profit and loss account, cash flow statement, management practices etc. while currency price movement happens basis on the factors such as economic data in the form of GDP, labour market, housing market, manufacturing and services sector, inflation, interest rate. 

Leverage: Leverage is the process where investor get an opportunity to generate more profit with lesser investment. Since derivatives are double-edged sword, while giving an opportunity to make more profit when the market performs as per your prediction, it also works in opposite direction when the market performs against your prediction. Leverage is similar in both stock trading and currency trading. 

Low margin: Currency trading attracts lower margin when compared to their counterparts in the stock market. Since size of forex contracts are smaller compared to stock contracts, it is most attractive investment tool for retail investors. The most popular forex futures are USDINR with contract size of USD 1000 while the popular stock index futures is Nifty 50. The forex contract attracts 3% as an initial margin while for Nifty 50 it is 12%. Since the size of the forex contract is smaller and margin is lower, it gives more leverage to retail investors. 

Participation: Currency trading gets its participation from importers, exporters, corporates exposed to currency market directly or indirectly, resident Indians, Foreign Portfolio investors and retail investors. Stock trading gets participation from retail investors, corporates, HNI, Foreign Institutional Investors and Domestic Institutional Investors. 

Trading hours: While you are trading in currency derivatives, you be getting an additional trading window of 15 minutes prior to stock market opening and 90 minutes after closure of stock market. As a customer, you are having access to all financial products such as stock, currency, and commodities, you can invest unutilized funds in trading currencies beyond 3.30 PM.

Additional Read: Low margin, High Leverage - in Currency Derivatives

Summary

In comparison to other futures contracts like index futures, stock futures, and commodity futures, currency futures are the most profitable for retail investors since they require the least amount of margin. Currency futures and options, because of their low margin and high leverage, are the perfect products for newcomers to the financial market to gain first-hand experience with derivatives. Currency futures and options are cash-settled contracts that are settled two days before the expiry month's last business day. The exchanges have created weekly contracts that expire every Friday, as well as monthly contracts, to entice more investors' participation. Trading currency and stock is advisable as both of these instruments are interrelated to each other thereby it would be one of the best portfolio mix for retail traders.

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.