One thing every prospective investor needs to know is that the Stocks and Forex market are unique in their own way. Even though the Stocks and Forex market are reasonably interconnected, they are also vastly different.
While factors such as market conditions, volatility, and volume may make Forex trading more attractive to a large number of traders, an investors choice most of the time will also depend on their trading style.
It is pertinent to note that both Forex and Stock trading comes with different risk levels, and most experienced traders invest in both the Forex market and the Stocks market. However, to the new investor, the decision to choose any of the financial instruments under review can become a daunting task.
What are Stocks?
Essentially, stocks are shares which are sold by a particular company. When an investor purchase stocks, that investor owns a certain percentage of that firm. As the company or firm makes more profit, the value of the stocks increases, and the investor, who is also known as a shareholder is entitled to dividends from the profits that the company make. Most investors decide to purchase stocks in a particular company because they are convinced that the company will do well in the future, and the value of their stocks will grow.
What is Forex?
Forex trading, on the other hand, focuses on only currencies. It basically involves the exchange of one currency for another. The foreign exchange market is the largest financial investment market in the world with an average of a staggering $5 trillion traded on a daily basis. A lot of investors find Forex trading more appealing owing to several reasons which makes Forex trading unique.
Here are some differences between Forex trading and Stocks trading you should note:
1Leverage
One of the high points in Forex vs Stocks trading is the issue of leverage. In the Forex market, traders have access to leverage that is as high as 50:1, some forex brokers even offer as much 200:1 or 400:1. This is in sharp contrast with the stocks market which has a maximum of 20:1.
It is pertinent to note that in forex trading, leverage can be good and can as well be bad. You can make an unimaginable profit within a very short period with a high leverage. However, if the market does not favour you, you can as well lose all your investment within a short period. In stock trading, the benefit of leverage is almost non-existent.
Another important thing to note when it comes to leverage in stock trading is that only a specific number of stock traders have access to margin accounts. This means that for stock traders to take advantage of leverage in the stock market, they have to meet certain qualifying requirements. This is not the case with forex trading; forex traders get access to leverage as soon as they open a Forex trading account.
2Market Volatility/Liquidity
The volume traded on the forex market cannot be compared with the stock market. The forex market has high liquidity, and this translates into tighter spreads and lower transaction costs. The liquid nature of the forex market is a welcome development for those who like to see quick results from short-term investments.
Some traders particularly lookout for sharp movements within the forex market in order to instantly place their trade and make quick profits. This shows how volatile the forex market can be. This kind of traders are known as short term or day traders. In the stocks market, you have to buy and wait for a certain amount of time to see results. This can be a turn-off for short-term investors. This is one important area to note when deciding between Forex vs Stocks trading.
3Simplicity
The simplicity of the Forex market is another good point to consider when deciding to embark on Forex trading. The Forex trader has little market dynamics to worry about as most of Forex trading is concentrated on the four major currency pairs, (GBP/USD, USD/JPY, EUR/USD and AUD/USD.) All a Forex trader needs to do is focus on the performance of the eight major currencies which are traded in pairs as they account for most of the trades executed in Forex trading. It is easier to keep an eye on the major eight currencies than thousands of stocks.
When trading stocks, there are much wider variables to consider. On the New York stock exchange alone, there are over 2,000 listings, and a trader in stocks needs to have a lot of information about each company that they intend to trade with on the stock market. They’ll need to consider variables such as debt profile of the company, earning potential, profit potential, cash flow, etc. This could be a major turn-off for quick traders when deciding between Forex vs Stocks trading.
4Dividends
Stock traders have an opportunity to receive dividends for their investment depending on the profitability of the company and the type of stock they buy. Forex trading does not offer dividends to its traders.
524 Hour Markets
In forex, trading is done through the inter-bank market. What this means is that forex traders can go on with executing their trade during the business hours of various countries. Thus, forex traders have the opportunity to carry out their business for almost 24 hours throughout the five working days. Most forex brokers are open for business from Sunday at 4:00 pm EST until Friday at 4:00 pm EST. This makes the forex market a seamless 24-hour market. The stock market, on the other hand, is only opened for 8 hours a day from Monday to Friday.
6Cost of entry
With as little as $50 to $100, an investor can start forex trading. This looks more reasonable to the average investor as it presents an easier opportunity to get into the financial market. Stocks trading requires much more investment capital for the new investor.
The bottom line
Now you know the difference between Forex vs Stocks trading. So which one of them would you go for? – Forex or stocks? In trading, the best principle is always to stick with what works best for you. If you know more about one market than the other, you might be better off staying in the area of your expertise in which you are more familiar with. If you are naturally more interested in individual companies, then it would make sense for you to trade stocks.
Whether you choose to trade forex or stocks depends greatly on your goals and preferred trading style. If you think more in terms of economical analysis between currencies, and the strength and weaknesses of one currency over the other, then, forex trading may suit you better.Perhaps you do not have a particular favorite financial instrument when it comes to Forex vs Stocks trading, and you tend to opt for anyone. If you are the kind of person that likes to invest minimally and instantly see returns on your investment, then, you’ll be better off trading forex.
I think if you are a beginner its better to go with stocks. Stocks are way less volatile than Forex. Just one crazy comment from some politician can totally ruin your trade. But, in all reality, neither of them are easy. It just takes time and effort and trial and error before you start becoming profitable.
I really think stocks are actually more volatile than currencies.
The Forex market is quite different than the stock market. It is very unregulated and the leverage can result in more risk. This is why you should always trade Forex with a stop loss. Margin calls are quite common for those who don’t know what they are doing.
Moves in the Forex market tend to be faster from my experience. Despite making most of my trading income from stocks I find that my smaller Forex profits are earned much more quickly. This means less time I have to wait per unit dollar. Many companies you trade on the stock market move quite slowly. This means you might be sitting in front of the computer watching charts forever just to see a small incremental gain. Using a lot of leverage you can make serious gains very quickly with Forex.
I’ve heard that Forex is better if you use more technical analysis while stocks might be better for those who trade more on fundamentals. is that right?