Active investors and traders now have access to many trading instruments, from tried-and-true blue chip stocks to the fast-paced futures and forex (or foreign exchange) markets. It can be hard to decide which of these markets to trade in, and there are many things to consider before making the best decision. The risk tolerance and trading style of the trader or investor may be the most important thing. For example, investors who buy and hold tend to do better on the stock market, while swing, day, and scalp traders may do better on the forex market, where prices change more often.

Putting Forex and Blue Chip Stocks Side By Side

The foreign exchange market, or forex, is the largest financial market in the world. Many traders are interested in the forex market because it is liquid, trades happen all the time, and traders can use a lot of leverage. The stocks of well-known, financially stable companies are called "blue chips."

Volatility

Volatility is a way to figure out how quickly prices change. Some traders, especially those who only stay in the market for a day or two, depending on price swings to make money. On the other hand, some traders prefer investments that are less risky and don't change as much.

Leverage

The second thing to think about is leverage. Most people in the U.S. can buy stocks with a 2:1 leverage. You can get up to 50:1 leverage on the foreign exchange market, and in some parts of the world, you can get even more. Is it reasonable to be in charge so much? Not always, no.

Time for Business

When choosing a trading instrument, you should also consider how long each one is traded. Stocks can only be bought and sold during exchange hours, usually Monday through Friday, from 9:30 a.m. to 4 p.m. Eastern Standard Time (EST) (except for market holidays).

Comparing Forex to Indexes

Stock market indexes are a group of stocks and a fundamental or financial factor that can be used as a benchmark for a specific sector or market. Traders and investors use the indexes to get a good idea of how the market as a whole is moving. Stock market indexes let traders and investors see the market through various products.

Volatility

E-mini contracts are popular with short-term traders in stock market indexes because they are volatile and easy to buy and sell. Let's say that the average daily notional value of trading in the major equity index futures is $145 billion, more than the total dollar volume of trading in the 500 stocks on which the futures are based.

Leverage

Futures traders can also use much leverage, just like forex traders can. For futures, this is called "margin," a required deposit that a broker can use to cover account losses.

Time for Business

The electronically traded e-minis can be traded almost around the clock (trading stops for about an hour a day so that institutional investors can value their positions). Still, the volume may be lower than on the forex market. Liquidity could be an issue depending on the contract and time of day.

Tax Treatment: Equities Vs. Forex

When it's time to pay taxes, each of these ways of trading is handled differently. For instance, short-term advantages on commodities contracts may be taxed lower than short-term advantages on stocks. Active traders may also be able to choose the IRS's MTM (Mark-To-Market) status, which lets them deduct trading-related costs like platform fees or education. If a person wants to claim MTM status from the IRS, they must trade as their primary business. Publication 550 from the IRS tells you how to become a trader for tax purposes legally.

Traders and investors should get help from a qualified accountant or another tax expert to handle their investments and taxes in the best way possible. This is especially important because trading forex can make it hard to figure out how to do your taxes.

In Conclusion

Thanks to the internet and electronic trading, traders and investors from all over the world can now take part in a wider range of markets. Whether you trade stocks, foreign exchange or futures contracts often depends on how comfortable you are with risk, how big your account is, and how easy it is. Stocks aren't the best choice for an active trader who can't be at the market during regular hours to buy, sell, or manage trades. On the other hand, stocks are a good choice for an investor who wants to buy and hold for a long time to get steady growth and dividends. Traders and investors should choose the instrument(s) that work best with their strategies, goals, and willingness to take on risk.