While the financial industry includes many different types of trading instruments, the majority of traders seem to prefer two of those instruments: currencies and stocks. But the question is, should you choose Forex or stocks? Well, to answer this question quickly – it depends.
When comparing Forex to stocks, it becomes obvious that the FX market is less volatile and offers more accessibility, be it conditions or technologies, than stocks. This means that the deposit requirements are usually lower, you get to use some of the best trading software (free of charge!) and, by using leverage, you can significantly increase your trading capital.
In contrast, stock trading is more volatile (especially in the COVID times), not as technologically advanced, and usually requires considerably larger capital to get started.
However, it’s not a sufficient reason to limit yourself to a single market. Let’s dive more into the details of these markets and discover the pros and cons of stocks and Forex trading.
Biggest differences between Forex and Stock trading
When it comes to differences between these two, the ones that you should always keep in mind are the very specific elements. These are volatility, leverage, and market trading hours.
Forex trading is known for its very high liquidity and around-the-clock trading. The amount of leverage mostly depends on the broker that you are using and the local regulations in your region or country. Also, the strategies that traders prefer to use are mostly short term trading strategies, such as, day trading and scalping, for example.
On the other hand, stock traders would prefer a long term trading strategy since they are mostly focused on long term earnings. So, when it comes to Forex or Stocks day trading, this strategy would be more useful for Forex traders because this one is considered to be a short trading strategy.
Over the years, it has been proved that stocks are able to be more profitable during challenging economic conditions. So, let’s say that because of the situation in the market, the prices of a certain company have fallen down. If you manage to buy the shares of the company during this time and you use a long term trading strategy, you will be able to sell it later when the market stabilizes.
Volatility, leverage, and trading hours – Forex vs stock profit differences
Volatility is something that measures short term price changes and movements. Those who are using short term trading strategies will find it very helpful. They are relying on volatility to make sure that they are making a profit quicker. Other traders are more comfortable with less volatile markets because, for them, it is a lot less risky to invest.
So, mainly, Forex traders, using strategies like scalping and day trading will use markets that are known for volatility, while others, who buy and hold their positions for a longer period of time, will use stocks because they are mostly more stable.
Leverage is another thing that should be discussed while talking about Forex vs Stock market differences. So, let’s discuss the situation regarding leverage in the United States. In States, if you are trading stocks, you will most likely have access to leverage of 1:2. On the other hand, FX trading leverage in the country can go as high as 1:50.
In other parts of the world, where the market is not well-regulated, you can come across much higher leverage. Some brokers in countries around the world offer as high leverage as 1:1000, which can be very risky for investors.
Another huge difference between these two is the market working hours. Forex market is open 24 hours a day because when one market closes, another one opens.
Risks of high leverage
Although leverage is something that investors might find helpful, it also is very dangerous and risky. It does provide a chance of bigger profits, but it also brings the risks higher. Trading with high leverage means that you can end up losing much more money than you were planning to, so many investors decide to avoid using high leverage. Many investors use the stock market because it is considered to be less risky because of low leverage.
While choosing the instrument to trade, you should also keep in mind the time when the instruments are traded. When it comes to trading stocks, the time that you have is very much limited. It mostly starts from 9:39 and ends around 16:00. The Forex trading market, on the other hand, is active round-the-clock. This gives Forex traders something that is very important for many investors – flexibility.
Forex vs Stocks pros and cons
No matter what it is that you are doing in the world of trading, everything has its advantages and disadvantages. In most cases, these pros and cons are very much subjective. Something that is a disadvantage for one might be an advantage for other traders.
For example, one of the biggest advantages of Forex is high volatility, it is very easy for beginners to access, and can be very profitable in a shorter period of time. On the other hand, it is a little hard to understand what are the main causes of the changes in the market.
Also, the prices of currency pairs are very sensitive when it comes to ongoing political events globally. Because of this, in addition to technical and fundamental analysis, Forex traders will also have to follow the ongoing process around the world as well.
Forex and Stock difference
On the other hand, one of the biggest advantages of stock trading is the huge variety of available products. There are thousands of companies on the market, the shares of which can be used by investors for trading. For long-term investments, stock trading is Laos much better option. The thing about stock trading is that it is much less risky compared to Forex trading.
While talking about the differences between these two, it is very important to discuss Forex vs Stock risk. The thing is, while trading Forex if you see that the market is not going the way you predicted, you can end up a lot of money. For stocks, you can simply sit back and wait for the situation to get better, and in most cases, it does so.
One of the biggest disadvantages of Stocks trading, however, is that it needs a lot of time and dedication from investors. You will have to sit in front of your computer doing research and understanding the things that affect the prices of the stocks that you are about to buy, which can be very much time-consuming.
Final thoughts on Forex vs Stocks for beginners
In the end, it is quite difficult to tell which one is a better option. At the end of the day, you get to decide whether stocks or currencies work better for you in the market. If you are someone who is looking for a long-term investment, Stock trading is usually a better option for you. However, if you are looking for short-term income, then you will most probably like Forex better.
But, no matter which one you want to trade, you should never forget that there are some risks with both Forex and Stock trading. Because of this, you should always do your research, use different types of indicators, and make moves when you are sure of your decisions.