With so many different markets to enter, stock and Forex trading are two of the major options for most investors. Some appreciate higher leverage capabilities and liquidity brought by forex day trading. Others prefer the regulatory safeguards delivered by the stock market.
Choosing the one depends on your preferences, goals, investing strategies, and trading personality. In this article, we will try to highlight the main differences between stock and Forex trading making it easier for you to decide, which one suits you the most.
Let’s have a look at the table below. It depicts some major differences between the two approaches. These differences will define what tools and instruments you will need when applying either stock or forex strategies depending on the market conditions.
|Forex Trading||Stock Trading|
|Leverage Limits||May exceed as much as 50:1||From 1:1 to 4:1|
|Liquidity||Bigger currency supplies, enough liquidity||Lower supplies, liquidity|
|Trade Pairing||All global currencies available for a trade||National currency only|
|Trading Hours||Round the clock, Monday-Friday||Generally, between 9:30 a.m. and 4 p.m. (EST), Monday–Friday|
The trading approach is also different. Mostly, Forex trading refers to technically-minded investors. You will have to deal with Forex charts and indicators a lot. This will take much time and generally refers to those who consider trading a full-time job.
Now, let’s have a closer look at all the major differences to define, which trading approach is better for you and why.
When you trade stocks, you are likely to have a margin account. Generally, it involves using leverage as much as 2:1. However, if you are a day trader eager to buy and sell stocks several times a day making a profit on the price action, it is possible to use as much as 4:1 leverage. The only challenge here is to meet specific requirements before you can benefit from better trading conditions.
Forex trading works differently. To start buying and selling currencies, you only need to open a Forex trading account. No qualification is needed. The leverage limit will depend on brokerage conditions established by a chosen trading platform. In most cases, new traders may expect as much as 50:1 leverage. In other words, Forex trading is a good option for those who search for a less regulated and easier-to-access financial market. Others consider additional regulations as an extra safety layer that can keep their capital and profit under control. So, it is up to you which particular trading environment to choose.
Trading stocks means purchasing an underlying company’s shares with the aim of getting dividends (another way is to speculate on the stock price when implementing day trading strategies). Shares are different in price. They may cost from several cents (penny stocks) to hundreds or thousands of dollars per share. The price strongly depends on asset supply and demand. Besides, large purchases can also influence the situation in the market, especially if a big player buys, for example, 10,000 stocks. It will strongly impact the stock price and create a fuzz on the market.
In Forex trading, all major currency pairs come with high liquidity. On the other hand, the supply can sometimes fluctuate creating a deficit in the short-term perspective. In the end, there will always be a huge number of different currencies to trade. Additionally, the market can be influenced by side regulators. For example, central banks can intervene in the currency market to improve the economic situation. This fact may also have consequences for the trading environment and liquidity in particular.
In the end, Forex trading comes with more asset supplies, which means no or little impact on the price of the currency. You will always have something to process a transaction with.
As you know, Forex trading is quoted in currency pairs. It requires investors to keep an eye on both currencies in the pair. You need to be concerned about the economic health of the country whose currency you trade. Additionally, it is important to consider the stability of the country’s currency against which you trade. So, there are dozens of factors to analyze (GDP, the geopolitical situation, etc.) not to mention forex charts and technical analysis.
When you buy stocks, the issuing company’s information is the only concern that will actually bother investors. The main question is if a purchased stock will grow in price. Besides, the only pair between you and stocks is USD (or the national currency at which the stock is traded).
Forex trading is more sensitive to geopolitical and economic events around the globe. Oppositely, major stock markets are less dependent on outer factors although they do not guarantee 100% immunity to crashes.
With Forex trading, investors will have a wider option of when to access the currency market. You can purchase and sell assets nearly round-the-clock from Monday to Friday.
When investing in stocks, you rely on the major stock market exchange trading hours. For example, the US brokerage system makes it possible for traders to access the market between 9:30 a.m. and 4:00 p.m. Hours can be changed or even cancelled during official holidays. However, there are some ways to access the market before and after-hours trading.
Forex trading will suit those who want to access the market 24/7. Besides, the selection of financial institutions with different time zones to process transactions is much wider.
It is more of a personal choice and the question of individual preferences. Before making up your mind, it is important to take into account the following:
The majority of beginner investors opt for stock trading as one of the safest and simplest ways to get started. They feel comfortable within this particular trading environment. Those who prefer higher profit opportunities and risk-to-reward ratio choose Forex trading. Although it comes in a less regulated investing environment, traders can keep control over their strategies using stop-loss orders and other risk-management tools.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.