Choosing to trade is already a difficult decision. You got to have guts if you want to trade. Now, choosing what to trade is even more difficult. Which market has stricter regulations? Which market promises more profits? What security is really safe? How to choose? Forex vs stocks? We’ll help you make up your mind.
Read also: Basic Rules to Remember in Investing
We all know that if we want to make our money work for us, investing is the way to go. For real life comparison, your typical savings account only earns less than one percent interest. Investments, on the other hand, can earn an average of eight to ten percent. As we all know, two of the most popular investments are forex and stocks.
Most people are familiar with stock investing. Basically, when you buy stocks, you buy a small share of a company. If the company performs well, its stocks’ value will increase. That’s where you earn. Further, some stocks give dividend payments, typically if the company does excellent job. Many investment programs have stocks as a common part. Examples of these are mutual funds and individual retirement accounts (IRAs). Additionally, there are a lot of online trading programs that can help you with this.
Meanwhile, forex stands for foreign exchange, as you may well know. Forex deals with international market, quite similar to stock trading. But the difference is that forex looks at only one thing—currencies. Almost everybody participates in this market. In fact, once you exchange your money for the local currency in another country, you’ve already done forex trading. The main difference is scale. The forex market revolves around eight major currency pairs. These pairs involve the euro, the US dollar, the yen, the British pound, the Australian dollar, the Swiss franc, the Canadian dollar, the Australian/New Zealand dollar, and the South African rand.
Now that we got an overview of the two markets, let’s tackle the characteristics of each.
If you’re going to choose forex, you can trade 24 hours a day from Monday through Friday. This is because the forex market does not rely on any geographic area. Even when a stock exchange closes for the day, another one in a different region opens.
However, even if you can theoretically trade anytime, not all times are best for you. Not all trading times are ideal. The market is open, but it’s not active at every instance. You must trade on an active market if you want to earn. Find the best trading time. The best trading times are when the markets related to the currency you’re trading overlap.
Further, experts suggest that the real advantage of forex trading is it gives you 5 days of trading. What does this imply? It means you can hold a trade overnight in the forex market. And you won’t worry about a huge gap when you wake up. This does not happen in the stock market.
This accessibility does not come without a downside, however. You may end up spending the night gazing at your screen, watching every tick. You bite your nails because of anxiety. That’s round-the-clock trading for you.
Leverage lets you amplify your gains by borrowing from your broker to purchase a part of a security. This entails magnified losses, too. Anyhow, many traders still like to use leverage. Let’s compare leveraging in the stock market and leveraging in the forex market.
In stock trading, you can usually trade with two to one leverage, max. You also have to meet some requirements before you can do that. If you plan to use leverage, you have to open a margin account. A margin account is what you need to access leverage, but not all investors receive approval to do so.
Meanwhile, in forex trading, you simply open a forex trading account. That’s all you need to qualify to trade with leverage. In the United States, you can use 50:1 leveraging. In other countries, you can leverage as much as 200:1.
As you may well know, currencies always come in pairs in the forex market. This means that you have two economies to monitor. The first one is the economy of the country whose currency is what you trade. The other one is the economy of the country whose currency is where you trade against.
Additionally, you’re concerned with varying fundamentals. To compare, let’s say you buy some shares from Apple Inc. Your biggest concern is whether the stock’s value will increase. You won’t worry much about the stocks of other companies. Forex trading is different. You’ll have to consider the fundamentals of the economics of the two currencies.
You have to ask some things to yourself. What’s up with their job growth? Which of them has better GDP? What about their political prospects?
If you want to succeed in forex trading, you have to analyze two complex entities. One giveaway: the forex market is usually more sensitive to political and economic happenings in other countries. The US stock market, meanwhile, reacts less though not immune.
Long or Short
The forex market has this ability to make you earn whichever direction the market takes.
In stock trading, you need around 20 stocks to create a fine ‘watch list.’ Meanwhile, you only need around 10 currency pairs in forex. Why? This is because they can practically double your trade setups. All this is because you can trade forex currency pairs either long or short.
In the stock market, you can go short in some cases. However, you’ll need to overcome a few headwinds. Further, many other traders frown upon this activity in the stock market. Why? It’s because you’re hoping that the company weakens. They believe that that’s unethical.
Forex ditches this problem. The only thing that you need look for is the right price action trading strategy.
For further reading, see Short Term vs Long Term Investment: The Difference.
If you’re choosing stocks, you buy shares of a company. And that can cost a few to hundreds of dollars. Their prices may be different and changing with supply and demand.
In forex, a country’s currency supply can move up and down. However, there will always be a huge amount of currency available to trade. Consequently, all major currencies in the world are extremely liquid.
When it comes to trading stocks, you can expect strong companies to retain its value or recover relatively quickly during down times or market crashes. That means that investing in stocks is better if you’re plotting your long term goals. If you value stability over instant stellar returns with equally high risks of losses, you can bet on stocks and breathe better.
Investment funds like mutual funds and retirement accounts offer services to those who don’t find amusement in poring over and paying a lot of attention to the market. If you’re one of them, trading in the stock market will suit you better.
Not sure how to pick a mutual fund? Read Some Rules to Consider in Picking a Mutual Fund
You can use individual retirement accounts (IRAs) to earn and earmark funds for your retirement savings. And you have several types of them at your disposal. The key takeaway is that you get yourself some tax benefits if you invest in them. Those tax advantages cannot be found in forex trading.
Meanwhile, a lot of investors agree that if you do stock trading, you can rely on your broker or firm. Once you find an investment firm, you can let them do the day-to-day decision making to them.
In the forex market, currencies’ values can go up and down very rapidly. That means you have to react as quickly if you aim to earn some cheese. Meanwhile, in stocks, you almost always have sufficient time. You can track trends without feeling like you’re chasing a runaway thief.
Unlike trading currencies in foreign exchanges, you can only trade stocks if a particular exchange is open. For instance, the New York Stock Exchange is only open from 9:30 AM to 4 PM. That’s on Eastern Standard Time.
What does this mean for you? Imagine you have a day job. Then, you decide you want trade on your own. You might not be on schedule to make trades.
Dividends are a good way to earn steady income. If you have the diligence and determination for high-paying dividend stocks, you can find one. They also offer some reinvestment programs, like DRIP and others.
Forex vs Stocks: Which is Better for New Kids on the Block?
When it comes to choosing, you don’t have to depend too much on your skills. It’s best if you hone them as you start, but the best way to choose is to consider yourself. Experts agree that your personality and goals should matter more. Assess your risk tolerance, learn more about the psychology of trading, and have well-defined goals. If you’re more of the invest-and-wait-until-you-make-money, stock trading may suit you just fine. On the other hand, if you’re more of the aggressive type, forex maybe the best for you.
As for skills development, read a lot. Read about different risk management strategies. Try understanding the efficient market hypothesis. Learn about investing legends. Dig deeper and learn about different stocks, like common and preferred stocks. In the process of developing your knowledge, you also develop your personality and goals. Overall, you will be your biggest investment. And it will certainly help you a lot in picking the best market for you.