To the untrained eye, the stock market and the forex market might look one and the same. While these two popular financial markets share many similarities, there are many differences when it comes to forex vs stocks.
This article compares these markets to help traders decide which to explore based on their trading style, goals or location.
What is Forex Trading?
Forex trading is an attempt to profit from movements in the currency markets. Since currencies trade as pairs, they’re pitted against one another, creating an oscillating ratio. These oscillations happen because of changes in supply and demand for currencies — usually driven by fundamental events that influence the particular market. Examples include the U.S. unemployment report, the Bank of England’s interest rate decision and the EU’s GDP projections.
In this environment, forex traders attempt to successfully predict the price movement through fundamental or technical analysis and profit by buying the currency that should appreciate or selling the currency that should depreciate.
Pros and Cons of Forex Trading
Forex trading has been around for decades, and its pros and cons are well documented. Consider the following.
Pros of Forex
- 24/5 market: The forex market trades 24 hours per day, 5 days per week. Regardless of their location, traders always have access to the market.
- Low cost: For traders who want to start with modest capital, trading forex can be cheap — especially if they’re trading only the most popular pairs like EUR/USD with tight spreads.
- Deep liquidity: Forex is one of the most liquid markets in the world. Liquidity helps the cost but also takes away scalability problems.
- High leverage: Forex brokers offer higher leverage than other markets. Usually, that is up to 1:50 or even more at some offshore brokers.
Cons of Forex
- Tougher trading environment: The biggest traders on the forex market are the financial institutions that are better informed and prepared than retail traders.
- High risk: The forex market can be very volatile. Combined with higher leverage, it can be dangerous for any trader.
- Lighter regulation: Forex trades over-the-counter (OTC), so there is no centralized exchange. Thus, regulatory oversight is somewhat limited, and traders must conduct due diligence before committing to a broker.
- Lack of yield: Except for more complex strategies like “carry trade,” forex offers no dividend payments like the stock market — limiting the passive capital growth
What is Stock Trading?
Stock trading is buying or selling shares in a publicly listed company to generate profits. Profitable stock trading relies on a correct price forecast to take positions before the anticipated move plays out.
For that reason, traders turn to fundamental analysis to identify undervalued (or overvalued) companies or technical analysis to spot recurring patterns in the market. However, a successful trade is often a combination of both.
Pros and Cons of Stock Trading
Stock trading is quintessential, as it has been around for centuries. Here are some of its competing qualities.
Pros of Stocks
- Historic growth: Stocks grow with an economy, offering a positive upwards bias. For stock indexes like S&P 500, this growth has averaged about 10% (pre-tax).
- Passive income opportunity: Many profitable companies pay dividends, distributing part of their profits to the shareholders. For some sectors like real estate, this can be in double digits, offering a significant passive income opportunity.
- Convenience: In modern times, trading stocks from any smart device is handy. Calling brokers and waiting for the price quote is a matter of the past — nowadays, everything works automatically in seconds.
- Liquidity: The stock market is relatively liquid unless you’re trading penny stocks. Depth of the market ensures high scalability and low costs. It is unlikely that you’ll have issues trading any blue chip stock.
Cons of Stocks
- Risk: Companies can go bankrupt and completely wipe out shareholders since they’re last to get compensated (after debt holders) if there is anything left.
- Emotional volatility: Stock prices can rise and fall, causing emotions from fear to greed. That volatility can be taxing, even for experienced traders.
- Competitiveness: Stock traders compete with institutions with more resources, time and often dedicated research teams.
- Time-consuming: Finding good opportunities on the stock market takes time since every publicly listed company is a world of its own.
Differences Between Forex Trading and Stock Trading
Despite many similarities, forex vs stocks trading has a few considerable differences.
Stock brokers offer modest leverage, up to 1:2, as per Regulation T. On the other hand, forex brokers can offer leverage up to 1:50, and for offshore brokers, it might be even 1:500 or more.
Forex market starts trading with an Australian market opening up on Sunday and trades 24 hours per day until the U.S market closes on Friday afternoon. Meanwhile, the stock market is open for a much shorter time. For the U.S stock market, that is between 9:30 a.m. and 4 p.m. ET.
The forex market is one of the largest in the world, with a daily volume exceeding $6.6 trillion. Meanwhile, the stock market is much smaller, with the combined volume of the New York Stock Exchange, Nasdaq exchange and Chicago Board Options Exchange not exceeding $300 billion.
Similarities Between Forex Trading and Stock Trading
Both stock and forex markets have considerable similarities, making it attractive for traders to switch between them.
Regardless of the market, almost all non-institutional traders operate through brokers — regulated intermediaries that execute transactions on their behalf. While there are specialized brokers, many large brokers offer both stocks and forex, making it convenient for traders to switch to whichever market they find the most attractive.
Short-term or intraday trading relies on patterns, momentum and relative strength. These concepts are evergreen and transferable between markets.
Technical analysis relies on the identification and analysis of patterns that repeat over time, looking to find reliable setups that produce profitable results in the long term. Many technical concepts like support and resistance, divergence or Elliot Wave theory perfectly apply on any market, including stocks and forex.
Forex vs. Stocks Which Is More Profitable?
Choosing between forex vs stocks is a matter of trading style, lifestyle and trading goals. Short-term intraday traders have to take their location into account as trading the U.S. stock market hours ain’t as convenient from some parts of the world, while the forex market is more accessible because of its trading hours.
However, trading goals will make an even larger difference. For a trader that enjoys volatility and going long as well as short, forex will be more profitable, albeit at a higher risk from higher leverage.
Meanwhile, for those who are focused on the long term and looking for passive yield, the stock market will be a better choice regardless of location.
When it comes to forex vs stocks, it’s really all about your goals and which market works best for you.
Best Forex Trading Platforms
Forex trading is best done through quality brokers — regulated intermediaries that buy or sell currencies on your behalf. In the table below, you’ll find Benzinga’s selection of the best forex trading platforms.
CedarFX is not regulated by any major financial agency. The brokerage is owned by Cedar LLC and based in St. Vincent and the Grenadines.
AUD$200 or equivalent
Best Stock Trading Platforms
Novice traders might get overwhelmed with a variety of platforms available for stock trading. Therefore, Benzinga has compiled a list of recommended stock trading platforms for any experience level.
Intermediate Traders and Investors
Benzinga is compensated if you access certain of the products or services offered by eToro USA LLC and/or eToro USA Securities Inc. Any testimonials contained in this communication may not be representative of the experience of other eToro customers and such testimonials are not guarantees of future performance or success.
Overall Global Broker for Short Selling
Frequently Asked Questions
What are the risks of forex trading compared to stocks?
The forex market offers significantly higher leverage that reaches up to 1:50 or even higher for offshore brokers. Combined with higher volatility, it is tempting to overextend and end up with significant losses. Furthermore, the forex market trades 24 hours per day, which makes it harder to monitor.
Does stocks or forex have the highest amounts of volatility?
Forex is more volatile than the stock market since currencies trade in pairs, which puts them under the influence of multiple political, social and economic factors daily.
Which is riskier stocks or forex?
Forex is generally riskier as it is exposed to more uncontrollable and unpredictable events. It is also harder to monitor (for swing and long-term traders) and offers higher leverage, making it more tempting for inexperienced traders.