By Adinah Brown
· Currencies are mostly traded out of necessity for transaction and funding purposes while penny stocks are almost always traded for speculation. The main forex pairs are less exposed to currency manipulation while the price of small cap company shares can be manipulated internally (pump and dump scams) and externally (rumour, failed takeover attempts). The real value of a stock is often hidden to speculators and there may be middlemen.
· Although penny stocks can double in price in a single day, they can also go the other direction. In fact, penny stocks can go to zero and they often do without the speculator being offered the opportunity to cut losses. Currencies usually only move within 1% either direction in a single day though misuse of leverage cancels out this advantage. Stop losses can be easily placed trading currencies.
· Only 50% of small businesses survive their fifth year in business and are heavily subject to business cycles. In contrast, currencies almost never go to zero and speculators holding losing currency positions often just wait it out until the market turns in the favor. Although an overnight premium may be paid, it can be received as well. Even if a currency speculator gets it wrong, there are strategies available to rectify the situation.
· While penny stocks suffer from a lack of public information and only those ‘really in the know’ have the key to accurate valuation estimates, there is a world of information applicable to currency pairs. Trading strategies, technical indicators, economic data, market sentiment, fundamental indicators, expert analysis and so on can be called upon to predict currency direction. For novices it’s easier to bet on the direction of an economy, rather on the direction of an unfamiliar company.
· While currency markets are generally not regulated, credible forex brokers usually are. On the other hand, a stock broker recommending a penny stock might receive a commission kickback. Retail brokers receive no such kickbacks and generally don’t make trading recommendations. Additionally, online broker trading fees are also highly competitive. Stockbroker fees are substantial and take a large chunk out of profitable trade.
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· Although margin lending can be accessed for trading penny stocks, a much higher amount of leverage can be accessed to trade currencies. You can trade currencies with as little as $100. Penny stocks may require more capital. Disclaimer: leverage can work both ways and misuse of it can lead to substantial losses.
· Trading penny stocks can be a painfully uneventful experience. A trader may have to wait weeks before the price of a stock moves up a cent. On the other hand, currency pairs are always moving with massive amounts of liquidity pushing the price in either direction. It may be more fun trading currencies but it can also be more stressful. Disclaimer: The author recommends holding currencies for days/weeks (and carry trading, not day trading).
· You can buy or sell a currency pair easily based on a prediction that the price may go up or down. It’s very hard to short penny stocks.
· You can trade currencies in all economic, geopolitical and financial environments. You can only really buy penny stocks in bull markets. Importantly, if a stock market tanks suddenly, the penny stocks listed on it will be steamrolled. Therefore, timing the business cycle is as important as picking the right stock. Currency markets are also open 24/5.
· Due to the competitive environment for online forex brokers there are many competitions and offers available. Cash back rebates are also a clever way to receive a payment based on the volume of your trading. Penny stock trading doesn’t offer any such enticements.
With stocks extremely overvalued, geopolitical concerns, Fed unwinding of QE and concerns the business cycle is nearing an end, trading forex may be a good way to find a return in an era of extremely low yield.
About the Author:
Adinah Brown is a professional writer who has worked in a wide range of industry settings, including corporate industry, government and non-government organizations. Within many of these positions, Adinah has provided skilled marketing and advertising services and is currently the Content Manager at Leverate.