Oh my, if I could count the number of times when the query on forex vs stocks comes around, you would be surprised.
There are numerous questions ranging from how big is forex market compared to stock market? Is forex easier than stocks? Forex vs stocks which is more profitable?
The questions are quite a number. These include those that I have been asked personally and ones that I have encountered on different platforms.
As a result, I find it prudent to touch on the topic revolving around forex vs stocks a little bit.
If you are not very familiar with trading, you are likely to wonder which is better between forex trading vs stock trading.
In present times, we have been subjected to a low-interest rate environment.
Central banks worldwide are still fighting with low growth, given that loose monetary policy has been their major response for years.
What does this mean for you?
When you leave money in the bank, it basically offers you little good. In most of the major economies, interest paid on savings is less compared to the rate of inflation.
This naturally leads to people seeking better investment alternatives for their money, including the viable financial markets of forex and stocks trading.
This is why there are a lot of questions regarding these two forms of trading. A lot of people are joining the bandwagon hence the confusion for the newbie traders.
In this post on forex vs stocks, I intend to shed some light by examining the differences that exist between forex trading and stock trading.
Forex vs Stocks
1. Trading Hours Involved
When it comes to operating hours, there is a contrast in the forex vs stock market.
Forex trading takes place 24 hours a day. This is contrary to stock trading, which operates on a more limited timeframe and purely on weekdays.
Part of the reason for this is that forex trading does not depend on a central exchange with a physical location.
It is conducted globally over Electronic Communications Networks.
Actually, it is vital that global trade for forex trading takes place 24 hours a day because foreign currencies are constantly on-demand worldwide.
Stocks and other securities are basically not so in demand after business hours in the country where the companies underlying such stocks are based.
This makes it hard to explain the reason for maintaining the market open past business hours.
There is quite a contrast in the level of leverage involved in forex vs stocks trading.
The leverage amount available in forex trading is overwhelming compared to the one available in stock trading.
This potentially makes forex trading really lucrative and also very risky. The problem is that most newbie traders are attracted to the lucrative nature of the market while forgetting about the inherent risk.
Forex trading basically operates at a 50:1 leverage in the US. This means that traders should have available in their brokerage account only 2% of the value of the foreign currency they are trading.
In other countries, depending on the regulation, you will even find a forex broker offering a leverage of 1000:1.
This is contrary to the 2:1 leverage common with stock brokers, where traders are required to have 50% of the stock’s value they are trading available in their trading account.
Among the most obvious differences between stock trading and forex trading is that they are regulated by different agencies in the relevant country of operation.
In an example of the United States, while the Securities and Exchange Commission manages all equities and stock options trading, forex trading falls under the purview of the Commodities Futures Trading Commission.
CFTC is a government agency, as well as the non-profit National Futures Association.
Among the main goals of these regulatory agencies is protecting individual traders and investors from unscrupulous brokers.
These unscrupulous brokers tend to be more prevalent in the forex market in countries that are not well regulated.
4. Size of the Market
It is also important to analyze the forex vs stock market size in order to bring a better comprehension of the two.
Despite the fact that stocks can be traded the world over, the market for equities is largely national rather than international.
On the other hand, forex works on a global spectrum.
The fact that forex trading takes place 24 hours a day aids the trade, as it makes it possible for forex traders to trade across any currency as per the time of day and the brokers that are active.
Consequently, while there are basically thousands of stocks to choose from on a single exchange, forex trading revolves so much around certain pairs of currencies that have specifically high liquidity.
5. Transaction Costs
There are two main costs associated with trading in the market. This includes the inherent commission as well as the bid-ask spread.
The difference between the market price to buy and the market price to sell is referred to as the bid-ask spread.
Any fees charged to your broker or exchange for trading in the market are included in the commission cost.
Some Forex brokers, referred to as dealing desk brokers, do not charge a commission and instead make their money by marking up the bid-ask spread.
Other Forex brokers, also known as ECN brokers, can charge a small fee but not a markup on the wholesale spreads.
In most cases, the ECN forex broker is more cost-effective in the long run.
The overwhelming majority of brokers in the equities markets would charge a commission for conducting a transaction.
If you use a discount broker or a full-service broker to conduct your trades, these fees differ significantly.
The rise of zero commission brokers has been a recent development in the stock market. Brokers that do not charge a fee for trading but rather these brokers profit from the order flow they create.
In the past, I have heard some people say that the forex market is more volatile than the stock market.
This is something that I tend to disagree with.
From experience, I can ascertain that the stock market is often more volatile than the forex market since currency pairs are usually quite stable when economic conditions are stable.
The situation is, however, not always like this, as the forex market is known for its moments of extreme volatility.
This may or may not coincide with moments of extreme volatility in national stock markets.
7. Factors Influencing Price
The types of news that influence forex and stock prices differ as well.
Global News has the most impact on forex prices, while news about the business underlying the stock or its sector has the most impact on stock prices.
Forex and stock prices will react to news about large-scale changes in economic conditions within a region, as well as political news that traders believe will have an immediate effect on the economy.
Contrary to stocks, forex is highly and constantly liquid because stocks are limited in supply to a greater or lesser extent as they represent shares of a company.
Blue chip stocks basically have many shares available and therefore have high liquidity.
Penny stocks on their part have a low number of available shares and therefore have low liquidity.
Currencies, on the other hand, despite them having a limited supply, they are unlimited for trading purposes under a normal economic environment.
Conclusion on Forex vs Stocks
If you’re still undecided on whether to trade forex or stocks, the response to this query should be determined by your risk tolerance.
Furthermore, if you want to speculate or invest in stocks or forex, you should know what your objectives are because whether you trade in the forex or stocks market is largely determined by your objectives and chosen trading style.
To help you decide the market to concentrate on, I have outlined the main differences between the forex and stock market in this post.
There are a lot of traders who are active in both markets.
When comparing forex to stock market trading, however, forex has a major benefit in terms of trading cycles, leverage, the lack of insider trading, and intermediaries, and the smaller number of currencies available compared to stocks makes it easier for beginners to analyze and track the market.
So, if you’re wondering whether to trade forex or stocks as a beginner or whether forex is better to trade than stocks, start with forex (this is just but my opinion).
With time you will have a better understanding of the debate revolving around forex vs stocks trading. From here, you will decide on whether to proceed with the forex or stock market or even choose both based on the experience that you will have encountered.