October 20, 2015 in Miscellaneous
Whether you want to make an investment that will boost your savings account or you want to build a diversified portfolio and a career in trading, investing in foreign exchange market, binary options or penny stocks may seem very appealing. In this article I am going to analyze and compare these three types of equities and determine all advantages and disadvantages they come with.
Forex is the largest and the most liquid market in the world and its trading value is more than $1,9 trillion per day. Before digital age only central banks, corporations and other large financial institutions were laying investments here, and with the introduction of internet and online brokerage accounts, everybody has a chance to buy and sell world currencies.
This market is known to be much less volatile than binary options, and especially penny stocks. Most currency values change very slow, usually for less than 1% a day. This makes Forex much less dynamic, and the only way to earn meaningful profits is by having enormously big leverage (even 250:1 in some cases). High leverages became an industry standard on Forex and although exchanging amounts that high sounds risky, extreme liquidity of the market makes these large investments the only profitable option. Forex market is also know for being very objective, because its size doesn’t allow large players or manipulators to change prices at their will.
One of the main market characteristic that makes it both popular and risky are the low margin requirements that online brokerage firms provide. With putting only $1,000 up front, trader can control 100 or 200 times bigger amounts, with borrowing the remainder from the broker.
Although being very liquid, there are still lots of factors that can influence currency supply and demand. Some of these are:
- Interest rates
- Economic performance
- Political situation, etc.
Binary options are very simple to trade and they are similar to red-black system in roulette, just the outcome of the trade is not only defined by luck, but by many other parameters that determine stock prices and different market outcomes. Comparing to investments in Forex or penny stock market, binary options certainly seem like placing a bet. The difference is that bids and asks are not determined by the “casino”, but by traders themselves and they are made upon probability of the proposition. The simplicity of the trading process for these assets, made them widely popular and there are many companies like NEDEX and Chicago Board Options Exchange that are authorized to sell binary options to US citizens.
One of the main benefits of this kind of investment is that all risks are capped and it is not possible to loose more than the cost of the trade. Unlike on Forex or penny stock market where pairs are barely moving, binary options come with the known payout which depending on the option can have really high reward to risk ratio. Capped risk, can also be viewed as a disadvantage because it caps traders gain at $99, even with the most favorable pair. Another good thing about these equities is that they are accessible even to beginner traders with very limited funds.
Every successful company of today started as a micro-cap stock. These stocks are traded on pink sheets or over-the-counter bulletin boards. They are known as much more volatile than the blue chip stocks and there are four major factors that determine this:
- Lack of information- penny stock traders need to find alternative ways to collect information about the company.
- No Minimum Standards– micro-cap companies whose stocks are sold on pink sheets, don’t need to fulfill SEC minimum standards, although lately OTCBB requires companies to file their documents to SEC in a timely manner.
- Lack of History- companies are usually newly found and have no track record.
- Liquidity- penny stocks generally have low liquidity, which enables certain traders to pump up the prices of stocks they own.
Accept having very low price per share penny stocks also have very quick moving intervals, much quicker than blue chip stocks as well as binary options or Forex. Their affordable price enables investors to buy as many as they wish, and make more diversified portfolio. Last but not least, certain stocks often move from micro-cap to mid-cap market, which multiplies its value several times, and provides great returns that can’t be acquired on Forex or binary options market.
All three of these investment opportunities are great for beginners. Penny stocks are definitely the most volatile out of all three, but they also offer the highest possible returns. For traders who want always to know their score, binary options with capped gains and losses, are definitely the best bet, while Forex is great investing environment for traders that prefer high leverage combined with relatively stable market. Investors can also try their lack on some other markets and invest their funds in: bonds, trusts, real estate, blue chip stocks etc.