Anyone new to trading is likely to wonder, "which is better: Forex or stocks?" Let's begin answering our question with a little economics 101.
We find ourselves today in a low interest rate environment. Central banks around the world are still wrestling with low growth for the most part. Loose monetary policy has been their main answer over the years. What's the upshot for you?
Basically, leaving money in the bank does you little good. In many of the major economies, interest paid on savings is less than the rate of inflation. As a natural result, people are searching for better alternatives to invest their money into such as the well-established financial markets of Forex and stocks. This article will consider the pros and cons of Forex and stock trading.
There is no hard or fast answer to the question of which is better. In the comparison of Forex vs. stocks, there will be benefits and drawbacks for each market. It ultimately comes down to how important those features are to you personally.
Let's take a look at an overview of each market first and then we can move on to drawing some conclusions about Forex vs. stock trading.
The Forex market is decentralized. It represents a trading network of participants from around the world. The large players in the Forex market include investment banks, central banks, hedge funds, and commercial companies.
The stock market is the overarching name given to the combined group of buyers and sellers of shares, or stocks. Shares in a company, as the name suggests, offer a share in the ownership. Usually, though not always, these transactions are conducted on stock exchanges. In order to raise capital, many companies choose to float shares of their stock.
Stock exchanges provide a transparent, regulated, and convenient marketplace for buyers to conduct business with sellers. Trading on these exchanges has historically been conducted by "open outcry," but the trend in recent years has been strongly toward electronic trading.
The stock market is immensely popular, but it is exceeded in size by the Forex market, which is the largest financial market in the world. When we weigh up the Forex market vs the stock market in terms of size, Forex takes the round.
Why do we care about the size? The greater the size of the Forex market, the greater its liquidity will be.
The Forex market is extremely liquid. This is a result of the vast number of participants involved in trading at any given time.
Large, popular stocks can also be very liquid. Vodafone or Microsoft are prime examples. Though once you move away from the blue chips, stocks can become significantly less liquid.
Why do we care about liquidity?
Liquidity makes it easier to trade an instrument. Generally speaking, superior liquidity tends to equate to proportionally tighter spreads and lower transaction costs.
Let's consider an actual Forex trading vs stock trading example, and compare some typical costs. Let's use Microsoft as our liquid share, and EUR/USD as our liquid currency pair.
When Trading Microsoft, you would pay:
The price of Microsoft, at the time of writing, is around $52 a share. The market spread might typically range anywhere from 2 cents to 5 cents for Microsoft in normal market conditions. This is a range of roughly 0.04% to 0.09%. Commission rates vary from broker to broker, but you might pay 10 cents per share. The commission is paid on the opening and the closing of the trade.
Now let's compare that to EUR/USD.
The most common type of retail FX trading is on a spread basis with no commission. This is the way in which our Admiral.Markets account works.
With EUR/USD trading at 1.1190, this is a round-trip transaction cost of 0.0001/1/1.1190. Want to know what that works out to as a percentage? It's less than 0.01%. In the case of this 'Forex vs stock market scenario', Forex has the upper hand.
The round-trip spread cost of trading the FX position is less than the market spread on the share. And there's more: once you factor in the share commission, the FX trade is even more cost effective.
You can also view real market prices via our Demo Trading Account.
See for yourself how the spreads compare.
Perhaps a key difference when it comes to Forex vs stocks is the scope of the trader's focus. When looking at an individual share, you can get away with concentrating on a fairly narrow selection of variables.
While you are likely to take note of wider trends, factors directly affecting the company in question will be more important, along with the market forces within its specific sector.
Relatively narrow metrics, such as the company's debt levels, cash flows, earnings guidance, and so on, will be of chief importance. These include:
With Forex, the focus is wider. A currency reflects the aggregated performance of its whole economy. FX traders are therefore more interested in macroeconomics. The focus will be more on general indicators such as unemployment, inflation, and GDP rather than on the performance of private sectors.
When you trade an FX pair, you are trading two currencies at once. You will always be buying one currency, while selling the other currency in the pair. A fundamental trader therefore, factors in the performance of not just one economy, but two.
Of course, you may focus on technical strategies instead of looking at fundamentals.
The FX market is a 24-hour market:
Trading a listed stock is limited, for the most part. Stock traders must adhere to the hours of the stock exchange. However, several major exchanges have introduced some form of extended trading hours. Stock traders may be able to participate during pre-market, and after-market trading periods.
These were once the domain of institutional investors only. Advances in electronic trading have made it increasingly accessible by retail investors also. The catch is that extended trading sessions remain notably low volume and non-liquid. When comparing volumes across a 24-hour period, FX wins again.
If you are looking to trade at any given time, the comparison of trading Forex vs stocks is a simple one - Forex is the clear winner.
A big advantage in favour of Forex trading vs stock trading is the superior leverage offered by Forex brokers. If you are physically trading stock, you are likely trading without the benefit of leverage. If you trade stocks using CFDs (Contracts For Difference), you can trade on margin.
Usually, the best kind of leverage offered is 1:10. It is not unusual for FX brokers to offer 1:50 leverage, while Admiral Markets offers leverage up to 1:500. This offers the convenience of being able to command a larger position for a given cash deposit.
Of course, it is important to be aware of how big your underlying position actually is and to fully understand the risks involved. Leverage can be a powerful tool but it can also put your activities to a quick stop.
So which should you go for in 2018: Forex or stocks? In trading, the bottom line is always to stick with what works. This means going with what works for YOU.
If you know more about one market than the other, you might be better off staying in your area of your expertise. If you are naturally more interested in individual companies, then it would make sense for you to trade stocks.
If you think more in terms of macroeconomics, then FX may suit you better. If you don't have a particular inclination, but are mindful of transaction costs, FX might be the way to go.
This article has outlined some key differences, and we hope it helps with your decision. Whichever side you choose, you will be able to trade it with Admiral Markets as we offer both FX and CFDs with MetaTrader 4 Supreme Edition.