Whereas the stock market has traditionally been the market of choice for the retail investor, more and more people are now turning their hand to a spot of forex investing. It is now easier than it ever has been to set up a forex trading account and to speculate in the currency markets.
But there are some things you should be aware of if you are novice investor. You might already know that the forex market is actually the most widely traded and most liquid market in the world and (perhaps understandably) you might want to get yourself a piece of that action, but you should go into it with your eyes open, not with any kind of blinkered view regarding the risks and potential returns.
The first question you should always ask yourself is how much money are you prepared to risk in your forex trading adventures? When I say risk, that is exactly what I mean, i.e. how much are you prepared to lose if all your trades go awry? The forex market is not like the stock market where you buy your shares and you then have the cushion of the share price to protect you. After all, it is highly unlikely your shares will be valued at zero, thus causing you to lose all your money (unless you are trading penny shares and everyone knows how risky they are).
No, the forex markets work in a different way. Any position you take out is highly leveraged, so although if the price moves in your favour you can make a fantastic return on your initial investment, if the price moves against you, potentially you can lose your entire deposit and more besides.
Be aware as well that the currency markets can move incredibly quickly and a winning position can head south rapidly! All it takes is one piece of bad economic news to come out regarding the currency you are trading and KERPOW! That currency gets hammered and your profit goes down the pan!
So if you don’t have a good appetite for risk, you are probably best avoiding the forex markets and sticking with stocks and shares.