Compared to stocks, forex has many advantages, one of which is the fact that you don’t have to go over the list of more than 7,000 listed stocks in order to figure out which company to invest in.
In forex, there are dozens of currency pairs available, however the major most traded pairs come down to just 4. Instead of owning a piece of a company with stock shares and worry about company’s ability to make money, you keep an eye on currencies and catch profitable trends of the market.
What are stocks?
Stocks are an investment into a company. A stock in itself represents the ownership of a piece of that company’s assets and future earnings. When you buy a stock, you are buying a small piece of that company and can enjoy profits if the company (and in turn, your stock) becomes more valuable.
There is a difference between privately owned stocks and publicly traded stocks. Stocks that are publicly traded exist on an exchange, for example, the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automatic Quotation System – Nasdaq, as it is better known. This is when a company has made itself publicly available.
Privately owned stocks follow the same logic, however, are not part of an exchange, and therefore can be more volatile, considering that they are often for startups and companies that have not been listed. Each investment also must be approved by the issuing company. There are also cases where private stock is offered to employees in startups, and can often be used as compensation, if cash flow is insufficient to pay wages at the beginning.
What is forex?
Forex is a portmanteau of ‘foreign currency’ and ‘exchange’. As currencies around the world increase and decrease in value, there is profit to be made by buying one, waiting until it increases in value compared to another, and then exchanging it back, therefore making a profit. This is forex in a nutshell.
Let’s go over some of the main differences between Stock versus Forex:
24 Hour Market
Both forex and stock markets are available 24 hours during the week. However, one of the exciting forex advantages over stocks is that forex brokers allow you to trade during US, Asian and European market hours and customize your own trading style.
While you can still trade EUR/USD pair even when European and American forex centers are closed (let’s say during Asian session), you cannot buy stock from Italian company which is listed in Italian stock exchange and not listed on Japanese stock exchange.
In order words, stock limits you to whatever the hours of the exchange are, while Forex trading gives you access to the market 6 days a week, 24 hours a day because there is no centralized exchange. This way you have a complete freedom to either get in or out of the currency positions.
In forex, market orders are processed instantly under normal market conditions. This means that you see the price you actually get when you execute an order.
Stocks only allow you to trade 2:1 leverage. Even for that, you have to fill enormous amount of applications and get approval.
In Forex, leverage up to 1:500 (and with some brokers even higher) is available to you from the moment you open a trading account. With high leverage, there are endless possibilities to make high profits with minimum capital investment.
Different fundamental characteristics are analyzed when handling stock versus forex. With stock, for example, when you buy a share of a company, you focus on whether the stock of the selected company will become more valuable or at least stay stable.
With forex, whether you are buying or selling, you have to consider factors affecting the countries of the currencies involved: unemployment data, GDP, consumer growth, political issues and other things influencing the value of the currency.
Forex brokers earn money from spread (the difference between ask and bid price of the traded currency pair). In most cases, there are no extra commissions or transaction fees in forex. With tight, transparent spreads, forex trading costs are lower than any other market.
With stocks, there are commissions on trades you choose to make.
Volatility and liquidity
A popular topic for the forex vs stocks debate refers to market volatility. This measures price fluctuations within the markets that can either help traders to gain profits if the trade is executed effectively, or losses if the trade is not successful. Forex traders in particular often look for high liquidity within the market, as this means that an asset can be bought and sold rapidly without having much of an effect on its price. Therefore, it is likely that high market volatility is more beneficial for short-term traders. Many forex strategies work to open and close positions in a short period of time, with the intention of making a profit from small price movements when the market is particularly volatile. This way, they can enter and exit trades with quick precision.
Unlike in stocks, forex market can be traded literally as your heart desires. You can go long or short and no one will say a word! The opportunities in currency market are everywhere – no matter how you choose to trade and which way the market is moving.
Your job is to buy or sell at the right time. There is no structure bias to the market, since there is always an equal access to trade, whether the market is falling or rising.
With stocks, when the company is going down, your shares and investment is going down with it. There is no turning back! There are restrictions on short selling and stop orders.
In other words, while a company can fail, major currencies will continue to strive!
In stock market, you need to use a broker or trade online, depending on the stock you choose to deal with. Forex trading allows you to trade online and all orders are executed electronically.
With stocks, you need to have at least $2,000 available. That’s quite an amount and not everyone is able to put down sums like that without thinking twice.
Forex allows you to start trading with as little as $100 or even less! There is an option of micro and mini accounts with minimum deposit of just $1.
There is also demo account available with every forex broker, where you can practice your trading skills until ready to go into the real trading.
Correlation between the forex and stock markets
It is common practise for traders to look for correlation between financial markets, in order to predict future price movements. In particular, the forex and stock markets have been known to correlate for various stock market indices and subsequent exchange rates.
For example, before the global recession of 2008 began, investors noticed a trend between the Nikkei stock index and the USD/JPY currency pair. As the Nikkei declined, investors would take this as a sign of weakness for the Japanese economy, and in turn, the USD would strengthen against the JPY. This is known as an inverse correlation. If the roles are reversed and the value of the Nikkei strengthens, the yen in turn strengthens against the USD.
Many traders can use currency correlations to predict future market movements when opening positions within both markets. Although there are significant differences between forex and stocks, they often work well together when analysing technical trading patterns. However, market predictions are not guaranteed and given the particular volatility of the forex market, correlations of stock vs forex can suddenly change with no indication of which direction the markets are heading.
Should you trade forex or stocks?
When it comes to deciding whether you should trade forex or stocks, there is no definitive answer because there are benefits and drawbacks to each market. Ultimately, your decision will come down to your personal preferences and attitude toward risk.
When making your decision, you need take into consideration your trading style and financial goals. If you are interested in a fast-paced environment, forex provides ample opportunities for short-term traders – such as day traders, scalp traders or swing traders. If you’re looking to take advantage of short to mid-term trends, or less volatility, the stock market could be for you.
Is forex trading worth it?
It is clear that trading in the forex market has many benefits compared to the stock market, which makes it suitable for a larger group of people due to its flexible hours, lower fees, and higher trading volume.
That isn’t to say however that you should completely avoid stock trading. If you are interested in investing or longer-term trades, the stock market may be better suited to your personality.
Trading both markets requires some of the same as well as very different skills – neither is, therefore, suitable for complete beginners – although forex may be better for newer traders with smaller capital.
If you would like to trade in either market, you should consider doing research and learning strategies and decide which market is best for you.
The Forex market provides you with a fast and accurate execution due to a highly liquid environment, while you are able to trade 24 hours per day with low spreads. This allows you to use very safe and flexible starting amounts, leverage and lot sizes. Stocks, however, have a much more limited trading window and direction, a much higher chance for delays in execution, slippage and price manipulation. Also, trades can bleed your account, as they can be very expensive in terms of commissions, and can carry additional risks due to their fixed starting amounts, leverage and lot sizes.