Stocks and forex are two of the most heavily traded instruments on the global financial market. Millions of retail and institutional traders flock to the markets to buy and sell these assets, in the hopes of accumulating and safeguarding their wealth.
But why are these two asset classes so important and what inherent pros and cons does trading stock and forex have for retail traders in particular?
Answering these questions requires analyzing the advantages and disadvantages that stock and forex trading entails, as no single asset class can deliver perfect results over the long run.
Retail Stock Trading – Pros and Cons
Retail stock trading has been around for decades and has been growing in popularity at a steady pace for a while now. However, the past decade has especially been important for the retail stock trading sector, as the trend of democratization of finance has swept the markets – giving millions easy access to stocks listed on some of the largest exchanges in the world, such as the NYSE, Nasdaq, LSE, and more.
Retail stock trading refers to the average individual trading with their own capital on the market, as opposed to a major financial institution, such as an investment bank or asset management firm doing it on their behalf.
Below we can look at 3 core pros and 3 cons of retail stock trading, which should help beginners better understand what the risks and opportunities are in the process.
3 Major Pros of Retail Stock Trading
While we could come up with numerous potential pros and cons of retail stock trading, focusing on three core advantages can be more helpful to highlight why someone might be enticed to take action and trade using their own knowledge and capital.
The core advantages of retail stock trading are the following:
- Accessibility – The modern stock market is accessible to hundreds of millions of people worldwide and traders can sign up after providing basic information regarding their occupation, source of income, residence, etc. This improved accessibility, coupled with the simple process of buying a particular stock, as well as fractions of a stock, makes it incredibly easy for retail traders to sign up and trade stocks on their own – both using their mobile phones or PCs
- Control and Flexibility – Due to the fact that the stock market is home to thousands of individual stocks from a variety of sectors, traders can come up with a near-infinite combination of strategies based on the prevailing market conditions, which lends itself to an elevated sense of control and flexibility to adjust whenever necessary
- Variety – Stocks come in all shapes and sizes. From industry titans like Coca-Cola and McDonald’s to startups and SPACs, as well as ETF-s, traders have access to a highly diverse market, which gives them the ability to diversify even their short-term holdings and hedge in this manner
3 Major Cons of Retail Stock Trading
On the other hand, there are some unique cons that are also associated with retail stock trading, which are:
- Emotional Decision-Making – When trades are not going as planned, traders can feel a lot of pressure when trading on their own. This is particularly true with stock trading, as the vast selection of stocks can feel overwhelming for some people
- Lack of institutional resources – Major financial institutions typically have access to high-end analytical software and data sources, which are either not available to retail traders, or come at a steep price
- Higher risk – Retail trading is generally riskier than institutional trading and investing, as an individual’s knowledge of the market, as well as their ability to act fast and take advantage of opportunities – is limited
Retail Currency Trading – Pros and Cons
Retail currency trading on the forex market also has a long history, with traders looking to take advantage of exchange rate fluctuations by using leverage to boost their buying power.
The margins in forex trading are notoriously slim, which means that most retail traders are virtually required to trade using leverage.
To learn more about forex trading for complete beginners, you can click here and look through a guide on where to start.
3 Major Pros of Retail Currency Trading
The three core advantages of retail currency, or forex trading, can be described as follows:
- High Liquidity – Forex is the most liquid market in the world, which makes it incredibly easy for traders to enter and exit trades without affecting the price of the asset
- 24-Hour Market – The global foreign exchange market is open and available to traders 24 hours a day, which makes it easier for traders in most time zones to access the market and trade
- Leverage – The use of leverage in margin trading allows traders to boost their buying power and open larger positions, which also boosts the potential profits and losses from each trade
3 Major Cons of Retail Currency Trading
On the other hand, the cons associated with retail FX trading are also worth considering:
- High Leverage Risk – Leverage also amplifies the potential losses, which can lead to devastating results when trades do not pan out as planned
- Market Complexity – The forex market is highly complex and each currency can be affected by a wide range of macroeconomic and political factors, which can make it challenging for retail traders to identify relevant and reliable information
- Potential for Scams – Unregulated scam brokerage firms can pose significant risk to client accounts