Investing in forex or stocks is a huge decision for any investor.
For many people, it’s been their whole life’s savings that they’re putting on the line to invest in this volatile market.
But what makes them both so different?
In this article, we’ll demonstrate the difference between forex vs stocks and you’ll learn which path you might want to take.
Check it out.
What is forex?
Forex is also called foreign exchange, FX, or forex trading. It’s the act of buying and selling currencies with each other.
Forex (foreign exchange) has more to do with currency exchange rates.
The forex market is the largest and most liquid financial market in the world.
Products traded include forex pairs (US dollar and euro forex, forex pairs with the pound sterling, Australian dollar forex…), forex crosses, spreads between different forex pairs.
The forex market is the largest financial market in the world by trading volume.
This makes forex trading risky, but also very profitable on a large scale.
It’s no wonder forex has turned out to be quite popular among investors!
However, forex is not without its own flaws.
One reason forex trading can be risky is that the forex market operates on leverage.
A forex trader is able to put down a margin as a deposit and enjoy trading a position with multiple times that amount of money. This amplifies profits, but also losses!
What are stocks?
A stock is a share of the ownership of a company that can be bought and sold on the stock exchange.
There are different types of stocks, including common stocks, preferred stocks, and convertible bonds.
Stock investing, or equities, involves purchasing shares from companies you think will do well in the future.
If you purchase stock in a company that successfully grows, you could make some nice returns on your investment.
Why is investing in stocks useful?
Investing in stocks is useful to invest in the future of these companies and to supplement your retirement fund!
Investing money in the stock market can be a good way for everyone to make investments in the future.
By investing spare change every month or by investing more aggressively, investors have the ability to save more and keep themselves afloat during times when saving becomes difficult or impossible.
The Key Difference Between Forex vs Stocks
The forex vs stocks comparison is a tough decision for many investors.
It’s usually their whole life savings that they’re putting on the line to invest in this volatile market.
But what makes forex and stocks so different?
Firstly, the biggest difference is the times they are traded:
Market Trading Times
When you trade, make sure that the market is open at times when you are free.
If not, then it will be hard to monitor your investments.
Forex trading is one of the few markets that operate 24 hours a day. This creates many opportunities for traders but also means there are times when you might miss out on an opportunity because you are asleep at night.
For this reason, it’s important to create a strategy for risk with stops and limits in place.
Trading at the best times can be an asset when trading FX. Typically, higher spreads occur during low-volume periods (morning, night).
However, if you are interested in EUR/USD for example, then overlapping markets will allow you to trade in London where there is a higher number of buyers and sellers thus lower spreads.
There are different forex trading sessions that you can take advantage of too.
Trading forex is an exciting and fast-paced market but also carries a risk of the markets moving while you’re not around to monitor it.
If trading forex proves too daunting for your tastes or budget, consider other less risky investments like stocks which are traded on domestic exchanges only during regular business hours.
When you are trading, you might be limited to the opening hours of whichever exchange.
While forex markets operate 24 hours a day, stocks are only open during normal business hours that are based in the country the exchange is from.
For example, in the UK the Stock Exchange is open from 08:00 to 16:30. So if you want to invest in UK stocks, you must be available during these hours.
Another point to consider that differentiates the two is how the newsflow impacts each asset:
What drives the price
One more thing to consider before trading forex vs stocks is what drives the asset prices.
In both markets, supply and demand can make prices go up or down. There are other factors that also change prices.
When buying shares in a company, you need to look at a few things. You will need to look at the company’s debt levels, cash flows and earnings as well as economic data and news reports.
However:
With forex trading, you need to watch more than just the economy of one country because you are trading two currencies at the same time.
It’s important to take into account many things like unemployment, inflation, and Gross Domestic Product (GDP), and news as well as political action.
Not many forex traders even focus on this information though, most retail traders just use technical analysis to generate trading ideas.
Yet if they understood this simple concept, they would be more consistently profitable.
Asset Trading Choices
There are many different stocks around the world that you can invest in. For example, there is Exxon Mobil and Tesla stock.
These are some of the more traded stocks that you probably know about.
However:
There are around 7000 stocks in the world.
That’s a pretty massive number to track each asset is impossible by yourself.
Whereas:
There are more than 150 currency pairs, including major, minor and exotic forex pairs, for traders to look out for.
Less certainly means more in this case.
All forex trading volume on a daily basis is usually higher than $5 trillion USD.
It’s estimated that forex volume exceeded $5 trillion USD in 2016 because of the rising popularity and usage.
In comparison:
The stock market has a trading volume of around $50 billion USD every day.
Now let’s dig into the assets themselves:
Stocks are equities of a company you can buy and sell on the stock exchange, while forex has more to do with currency exchange rates.
Stocks:
You receive a share of the company’s profits through dividends
Investing in stocks can be less risky than forex trading
You can check out a company’s fundamentals to understand the cash flow of the business which will give you an idea of future growth.
You can diversify your investments to protect from sharp market movements.
You are buying (or selling) into the performance of one company.
Forex:
Forex trading is not limited to a fixed company like stocks.
You are trading on the growth (or contraction) of an economy
Forex traders can use technical analysis to know when the price will change drastically.
Trading forex tends to have lower commissions and fewer taxes applied to a transaction compared with stocks.
Why might forex be a better investment for me than stocks?
Trading forex might be a better investment for some people.
One of the reasons forex might be a better investment is that forex has more to do with currency exchange rates and forex moves much faster than stocks.
You can start forex trading with lower capital requirements (not advisable though). What this means is forex trading has small requirements for how much money you need to start.
It doesn’t cost a lot of money to start stock or forex investing. But you might need more money if the market goes down.
The foreign exchange is traded 24/5 while stocks are only traded during the day.
What this means is that you are able to change your position in the Forex market any time.
You can do this at any time, unlike in the stock market, where you must close your position during trading hours.
Fees and commissions tend to be much lower than buying and selling shares too.
Finally, with shares, you can be overrun by the thousands of different stocks to buy or sell. Whereas with currency trading, there is a tiny fraction to focus on.
Both present opportunities each day, which is the important point.
Is the stock market safer than forex?
When it comes to forex vs stocks, It depends on the individual’s personal preferences.
If you’re looking for safety in your investments, forex might not be the best idea.
Forex is a highly leveraged product for most retail traders.
And if you do not understand what you are doing, you can quickly blow up your account.
Stocks, on the other hand, are just as risky but you will actually own something of a company you purchase.
This entitles you to receive dividends (if they are offered) plus shareholder specials such as discounts off the companies products.
Generally speaking, stocks appear safer because if the market is going up, then most of the stocks is following it. Hence why people focus on indexes too.
Forex vs. Stocks: Which is best?
It’s not an easy question for anyone to answer.
Both forex and stocks are volatile.
However:
Generally, stocks are more conservative than forex.
If you want to accumulate trades and build a portfolio over time then look into investing more.
If you want to take multiple slices of the market pie, without holding a position for too long.
Then trading forex may be for you.
Conclusion
Forex vs stocks is two investment vehicles that many investors have been debating about for years.
It’s understandable:
forex and stocks share some similarities, but they also have their differences when it comes to how you can invest in them.
Generally, if you want to take multiple slices of the market pie without holding your position too long then trading forex may be right up your alley.
However, if you want something less risky with a higher chance of success over time, investing in stocks might be the better option.