Forex vs Stock Trading: Which one is better?
How does forex trading differ from stock? Let’s find out.
The choice of whether to trade Forex or stocks is a personal one. There are similarities but also vast differences.
It's super easy to get started trading Forex but can be more challenging for a novice to know where and how to start trading stocks.
One of the main attractions for trading Forex is leverage. It's also a liquid market with $6.6 trillion traded every day, and it continues to grow.
In this article, we will outline the main differences between trading stocks and Forex.
How Does Leverage Compare Between Stocks & Forex?
There are no qualifying requirements for opening an account with a Forex broker, though we suggest using a regulated broker.
With Forex, most brokers offer leverage. Some countries provide as much as 500:1, but other countries have limitations on leverage. Currently, in the United States, leverage is capped at 50:1 and in the UK, EU at 30:1
When trading stocks, traders who have a margin account can leverage as much as 2:1, but if positions are closed on the same day as opening, they can trade up to 4:1. Margin is not a given with all stock brokers as you have to be approved before they issue it to you.
Which Has More Liquidity – Forex or Stocks?
Liquidity is dependent on supply and demand.
Forex is a high liquidity market, with trillions of dollars traded every trading day. There can be fluctuations of liquidity for each currency pair depending on what is happening with the country concerned, but, in the main, liquidity is never, or rarely, an issue when trading Forex.
Stock prices are highly variable. You could be buying a stock for a few cents to hundreds of dollars. Liquidity will vary according to the supply and demand of the stock. If you are trading stocks, look for a broker who offers the opportunity to see order flow so you can assess the volume of the market
When trading Forex, currencies are quoted in pairs. If you are doing fundamental analysis, you have to consider both sides of the currency pair. It follows that your checks will involve analysis of both countries' economic health, including unemployment and interest rates, current GDP and political interests. Your analysis also includes checking the economic calendar for upcoming financial news announcements.
The Forex markets can be sensitive to emerging political and economic situations. You would, for instance, consider the current status of imports and exports between countries and how they correlate.
When trading stocks, you are only concerned with that particular stock and its value. It isn't necessary to know what other stocks are doing in the market. All you want to know is whether the stock will rise in value
How Does Trade Activity Affect Price Sensitivity for Forex and Stocks?
The two markets are chalk and cheese.
If a big purchase occurs for a stock, say 20,000 shares, it may impact the share price. This impact is especially noticeable if it's a global company like Microsoft, for instance, with few shares available.
Forex is the opposite. A trade of several hundred million dollars pitched into the market is unlikely to influence a currency market price. It takes a colossal amount of money to make the price move significantly in the Forex market.
Comparing Market Accessibility of Forex and Stocks
The Forex currency market has far greater access than the stock markets.
The Forex market trades 24-hours a day for six days a week, giving access to traders from any country to trade during this time.
Whilst it is possible to trade stocks for 24-hours for five days a week, it's not easy. Most retail investors use United States or United Kingdom Brokers and the trading period is 9.30 am to 4.00 pm. After-hours trading is limited and the other issue is that volatility and liquidity can be problematic at these times.
Are There Bear Markets in Forex?
The short answer is no, not exactly.
If a bear market hits the Stock Exchange, share prices plummet, and many people lose money on their portfolio.
Remember the great financial crash of 2008? The United States National Bureau of Economic Research (the official arbiter of United States recessions) says the recession began in December 2007 and ended in June 2009.
The crash caused a recession that lasted eighteen months. The recession spread worldwide.
On September 29th 2008, the Dow Jones Industrial Average fell 777.68%.
Had you been holding shares at this time, it would have been challenging to maintain your position without losing everything.
Technically, you can make money in shares from shorting the share, but it's risky, and you could have unlimited losses. The likelihood is that your broker closes your short position.
Shorting shares is not an advisable route.
Now, with Forex, it does not matter what is happening in the world because you can ride the wave of a fall as easily as you can surf the waves of an upward trend. You can make as much money with a price drop as a price rise. All it involves is the careful analysis of price action and study of fundamental analysis and technical analysis.
In short, a bear market in the stock market may cause sleepless nights. A bear market in Forex could potentially make you rich.
How Regulation Differs Between Forex and Stocks
The Stock Exchange is heavily regulated, with many limitations.
Forex has fewer restrictions on regulations. Whilst the latter may seem like a good option, in most cases, regulations are there to protect the trader and investor.
With fewer Forex regulations, many novice traders jump into trading Forex, thinking it's the way to become rich. They quickly discover it isn't and end up losing all of their money
Is it Better to Trade Stocks or Forex?
Most people have a rudimentary understanding of stocks and shares and are not familiar with Forex.
The freedom of regulation and the higher leverage of Forex appeals to the novice trader. These things make it possible to leverage larger amounts of money than a trader has, and whilst that sounds appealing, it is a significant risk.
Anyone can open a Forex broker account, deposit funds and start trading without any education or skill. It's the equivalent of having your first swimming lessons in the open sea in a storm. Not the best idea.
Recap of Forex vs Stock Trading
Trading Forex or stock is a personal choice. Trading either financial instrument is not easy. It takes time to learn how to manage the trading process and identify good stocks to buy or which currency pairs to trade.
Trading stocks and Forex both involve high risk. Forex can be more accessible for a novice trader to get started because most Forex brokers offer micro-lot accounts where you can trade with mini lots, thus reducing your risk.
There are no qualifying requirements for opening a Forex broker account, and most Forex brokers offer a demo account. For as long as you like, you can practice trading Forex without risking your money with a live Forex account.
When looking for a broker, always choose a regulated broker licenced with their countries Financial Governing Body.
Stock brokers may offer a stock simulator account, and this works similarly to a Forex demo account. Again, time spent becoming familiar with the stock market and specific shares can help prepare you for buying shares with real money.
The most successful stock traders and Forex traders tend to become familiar with a few select stocks or one or two currency pairs.
As you study historical price data, you learn to identify price points where the price may reverse. With experience, you start to get a gut feeling about what may happen in the market. Over time this develops to a high degree of accuracy.
As a trader, it never or rarely pays to trade anything and everything. You become a jack of all trades, and it is impossible to keep track of what is happening with each stock or currency pair.
It pays to become a specialist in a chosen area.
Before deciding whether to trade Forex or stocks, spend time learning about how both work. Read more articles or books and watch videos. Most traders either trade Forex OR stock. Very few traders do both.
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading financial instruments such as Forex and Stocks may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.
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