‘Forex vs Stocks’ is among the oldest topics, but it still remains relevant. Any securities trader has these two popular markets to choose from. The main reason forex markets are often chosen over stock markets is due to their enhanced leverage opportunities. On the other hand, stock markets are chosen by those who prefer the regulatory standards that are in place to safeguard their investments. In this post we will take a look at other forex and stock markets and compare the pros and cons offered by each trading system.
Paradoxically, while the forex market is far more volatile, it is also far less prone to major crises, because whether the market falls or rises, an experienced trader will know how to take advantage of the situation.
Forex trading vs stock trading: key differences
Let’s take a brief look at some of the difference between stock trading and forex trading:
- Leverage limits
In a typical stock trade, a trader can execute a trade with 2:1 leverage. However, day traders who close and open all their positions with just a single trading day and maintain a balance of $25 000 in their accounts can trade with 4:1 leverage. There are some other requirements that need to be fulfilled before you can execute trades with this leverage. On the other hand, the forex market works in a very different manner. For starters, there are no qualifying requirements to trade with leverage in forex. The exact leverage limit depends on several factors, but a 50:1 trade leverage is very common in the forex market.
Liquidity is one of the other major benefits enjoyed by forex traders. In a typical stock market, you would buy shares of different companies and the price of each share will depend on the demand and supply of that particular share. Though the currency of any country can fluctuate based on various factors, there is generally always more money available in the economy to stabilize the currency. This makes the forex market relatively stable, and the fluctuations experienced by stock market traders can be avoided with forex trading. This is another plus point about forex in stocks vs forex debate.
- Trade pairing
When trading currencies, they are always quoted in pairs. When trading any currency, you should keep in mind the economic health of the country whose currency you are going to trade. When trading stocks, you only have to worry about just the price of one commodity. For example, if you buy Intel shares, you are just concerned with how the company performs and you don’t have to worry about the underlying currency. But when it comes to forex trading, things can get a little complicated because you have to keep an eye on the value of two currencies. Don’t forget that forex trading is prone to geopolitical issues.
- Market hours
Trading stocks is easier than forex because it offers great flexibility in trade timing. A typical stock market will open for 8 hours a day, 5 days a week, but forex trading allows you to trade 24 hours a day, 5 days a week. This means greater flexibility for those who have a day job and want to keep their trading to their off time. If you are starting trading as a side hustle, you should keep in mind that market hours greatly favor forex trading.
Trading forex vs stocks – which is better for you?
Just like most other things in the world, there is no specific answer to the forex vs stock market debate. It just depends on who you are and what your trading goals are. Let’s take a look the optimum scenarios for each trading route:
- When forex trading works better
Forex is a market relatively free of regulations and the overall trading environment is very easy which means it is a great way to execute large trades with ease. A newbie trader can access many of the resources that any seasoned trader has which makes it a great potential market for generating profits. On the other hand, a stock trader needs to acquire several qualifications and a significant capital to trade like pros. If you are a person who is eager to start trading like pros then forex trading is for you.
- When stock trading works better
Understanding the stock market might be easier than forex because the concept behind it is rather simple. When you are buying the stock of a specific company, you are essentially buying ownership in that company. If that company comes up with a breakthrough invention, it can make the company more valuable, thus increasing the price of your stock as well. These types of trading occur 8 hours every day from Monday to Friday around the world. Stock market is much more stringently regulated than the forex market, and the leverage margins are far smaller compared to forex. However, due to added regulations, the stock market is a rather safe market to invest your money.
Which is right for you?
You need to be aware of which option works best for you. Both stock trading and forex trading have their differences, so you need to know how to differentiate between them. Here is how you can choose the right option.
When forex trading works best?
With forex trading, you get a sort of comparative freedom from the trading regulation. Plus, since you have a much higher leverage, you get a bigger control of the trade. This is a good option for both seasoned and beginner traders, who are still working with low capital.
Forex trading also has numerous tools that you can use, and you do not require special qualifications. You can trade as you go. Stock trading is more complicated in this regard, as it does not have as many limitations. If your purpose is to trade higher amounts of money while being on a relatively low capital, forex trading is the one for you.
When stock trading works best?
While carrying a slightly bigger investment than forex, stock trading is much easier to understand. In essence, when you are buying a stock, you are getting a small ownership share of that company. Together with an environment that is highly regulated, this gives you more stability that helps you work better on your trading strategy.
That being said, short-term traders might not find stock trading to be such a convenient solution, as it carries more risk. Currency pairs perform much better in the short term. However, if the market is good and you are planning to invest in the long term, then stocks are a much better option. They are also a great alternative for those that do not want to make multiple trades per day and prefer to hold them for longer.
So, to keep things nice and simple, let’s summarize everything. In forex trading, leverage rates are high, which means you can execute much larger trades. Also, forex trading platforms offer many valuable tools to new traders, which can really help you take your trading to the next level. On the other hand, stock trading has many more mandatory regulations in place as compared to the forex market. These added regulations also make stock trading much more secure. At the end of the day, choosing the appropriate trading market for yourself will depend on your unique mindset and trading goals.
The bottom line
Most investors are more familiar with the stock market than with forex, and that familiarity may be comforting. Others will prefer the higher risk/reward ratio that comes with the unregulated forex environment and its high levels of leverage. Whichever you choose, trade carefully and control your risk with stop-losses.