Trading Forex vs Stocks: What's the difference?
Our Forex vs stock trading guide will help you decide which market is better for you to trade on. We will compare their general differences in terms of trading, trading options, liquidity, trading times, market focus, margins, leverage, and more!
Table of Contents
Forex Trading vs Stock Trading | Which is More Profitable?
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. So 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 vs stock trading.
Forex vs Stock Trading | Markets
There is no hard or fast answer to the question of which is better, forex vs stock trading. Whether we are talking about for experienced traders or the stock market vs Forex trading for beginners, when comparing, there will be benefits and drawbacks for each market and for each type of trader.
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.
- Stock market trading is the overarching name given to the combined group of buyers and sellers of shares, or or people trading 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.
Stock market trading 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 stock market vs Forex trading 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.
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Forex vs Stocks | Comparing Liquidity
The next important aspect to consider in the Forex vs stock trading debate is liquidity. The Forex market is extremely liquid. This is a result of the vast number of participants involved in trading at any given time.
If you are trading stocks, you will notice that large, popular stocks can also be very liquid. Vodafone and Microsoft are prime examples. Though once you move away from the blue chips, trading 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 a 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:
- A market spread
- Commission to your broker
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 upon 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 the Trade.MT4 account works. On such an account, you might pay 1 pip of spread to trade EUR/USD, with no commission.
If you are interested in trading with Admiral Markets, it's important to note there is a selection of account types available that offer a variety of services.
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 comparison, 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.
Narrow vs. Wide Focus
Perhaps a key difference when it comes to Forex vs stocks is the scope of the trader's focus. The next topic we will consider in the stock market vs Forex trading debate is range of 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 will be of chief importance, such as the company's:
- debt levels
- cash flows
- earnings guidance
With Forex, the focus is wider.
A currency reflects the aggregated performance of its whole economy. FX traders are therefore more interested in macroeconomics. This is where the technical analysis of Forex vs stocks differs. In Forex, the focus will be more on general indicators such as:
- GDP (Gross Domestic Product)
These will take precedence over 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.
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Comparing Trading Times
When debating Forex vs stock trading, we must also consider trading times. The Forex market is a 24-hour market, and it has no single central location; therefore, participants are spread across the globe; and there is always a part of the market that is in business hours.
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, Forex wins again. If you are looking to trade at any given time, the comparison is a simple one - Forex is the clear winner.
Margin and Leverage
When we are trying to answer the question, 'Is it worth it to trade Forex?', specific features of the Forex market come to mind - such as Margin and Leverage.
A big advantage in favor of Forex vs stock trading is the superior leverage offered by Forex brokers. With leverage, a trader with a smaller amount of money can, potentially, earn a larger profit in Forex vs stocks profit. However, while profits can be much larger, losses can also be multiplied by the same amount, very quickly. It is in this way that Forex is riskier than stocks.
However, 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 Admirals offers leverage of up to 1:30 for retail clients, and 1:500 for professional clients.
You can find all the details regarding retail and professional terms, the benefits, and the trade-offs for each client category on the Admirals website.
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 a quick stop to your activities.
Another common question traders have is a more specific one: when it comes to stocks vs commodities vs forex trading, which is better? We'll discuss this now.
Stocks vs Forex vs Commodities
If we are discussing Forex vs stock trading, it might be beneficial to also discuss commodities trading. When it comes to stocks vs commodities vs forex trading, which is better? Here is a brief outline of the differences between each market.
Characteristics of stock market trading
- Traders may own the asset
- Usually long-term investments (buy and hold, etc.)
- Price based mainly on financial states of business
- 8 hr market
- Usually a low spread
Characteristics of the commodities market
- Investors don't own the asset
- Usually short term trading
- Price is based mainly on supply and demand
- 24 hour markets (closed on weekends)
- May be a high spread
Choosing between commodity trading vs stock trading will usually be based on a few key considerations. Perhaps you are interested in capitalizing on short-term movements found in the commodity market, or you prefer the long term investment nature of stocks.
Which market movers fit best in your current knowledge base? Last, but not least, what is your risk appetite? Specific assets, such as oil, are sometimes highly volatile. As such, the commodity market is sometimes better suited for those who can afford higher risk trades.
Forex trading has several advantages:
- It's a big, worldwide market
- It's suitable for beginners
- One can trade Forex 24 hours a day
- Low transaction costs
- It's a highly liquid market
- There’s reliable Technology for Forex trading
- It’s a regulated market
We can't say which feature from this list is most attractive; however, leverage is one that gets a lot of attention. Leverage gives traders the opportunity to multiply the size of their potential profits (and potential losses). For traders with a high risk appetite who very skilled traders are able to take advantage of leverage.
At the same time, 24 hour access to the currency markets and high liquidity make Forex a very attractive option for both beginners and advanced traders.
I speak more on leverage in a later section. Overall, is Forex trading worth it? It is worth it to many traders. You must decide for yourself if you are one of them.
Now, what about those traders interested specifically in penny stock trading? Penny stock trading a highly attractive option for some traders due to their exciting nature and the potential for large profits with a low initial investment. We'll now compare Forex trading vs penny stocks.
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Forex Trading vs Penny Stocks
While many investors with limited investment capital may both consider penny stocks vs forex trading, either arena will be more attractive to specific types of traders.
The Appeal of Forex Trading and Penny Stocks
The penny stocks vs Forex trading debate is a common one among a specific group of traders. Penny stocks are sometimes attractive to traders starting off with limited investment capital. They offer an opportunity to enter a market with a relatively little amount of money with the chance of great profits within several years.
While the possibility of generating enormous amounts of money in a few years is unrealistic, the opportunity to enter a market with a small investment remains. When investing in stocks or bonds, you often need a larger investment, upfront to see enter the market and see significant returns.
If an investor is operating a portfolio of about $60,000, a 10% return will result in a substantial amount of money. For a trader with only $500 dollars invested into some security, a 10% return won't even cover the cost of a new phone. Investing in traditional stocks doesn't offer the potentially explosive growth that penny stocks can, nor the large degree of leverage the Forex market offers.
Penny Stocks: A Speculative Market
One key aspect to consider in the penny stocks vs Forex debate is speculation. Penny stock trading are attractive to traders who have limited funds, are comfortable with highly speculative markets with high risk and have the time and inclination to perform the necessary research to be successful in this market.
Penny stocks are commonly known as shares that can be traded for less than $5. As such, they can be traded on regular exchanges like the Nasdaq. However, many people know penny stocks as those extremely low-cost shares that are traded via over-the-counter exchanges or pink sheets markets, which aren't regulated like the Nasdaq and other regular exchanges.
The primary difference between penny stocks and stocks of a higher price is that trading penny stocks requires much more research and effort to get current and reliable information about the company you are considering investing in. This is because these pink sheets markets are not regulated by the Securities and Exchange Commission (SEC). As such, they are not as strictly regulated regarding what information they must provide to the public.
Additionally, penny stocks can be promoted and surrounded by unreliable information. Therefore, to become a successful penny stock trader, one must spend an extra amount of time and energy finding reliable information to help in their trading decisions.
Penny stock traders also need to be comfortable with making high-risk, highly speculative investments. Many of these trades will likely not pay off. These are key points to consider in the penny stocks vs Forex debate.
Forex Trading: Leverage Market
The second part of the Forex trading vs penny stocks debate - Forex. Forex is an entirely different asset class than penny stocks. It is more suited for traders who prefer trading and investing in basic assets like currencies, instead of picking specific companies to invest in.
As wer mentioned above, one key appeal of Forex trading is the immense leverage one has access to. A trader can often put up just 1% of the value of the Forex contract. Leverage is largely responsible for the explosive growth of traders entering the Forex market.
Traders can enter this market with a little initial investment with the opportunity of earning immense returns. Very few other markets offer such opportunities for such substantial gains so fast with little up front investment.
Remember that while such an opportunity exists, there is an equal opportunity for equally-sized losses. Trading with leverage multiplies the size of your potential profits to the same degree it multiplies the size of your potential loss. Sound risk management is an essential aspect of any trading strategy. It can help traders avoid incurring such losses they can't afford.
Lastly, the forex market is heavily regulated, unlike the pink sheets markets. Information about the different currencies available for trading is plenty and easily accessible.
So, is Forex trading worth it? While penny stocks are attractive to traders who are willing to perform copious research and are comfortable with highly speculative and risky markets, Forex trading is more suitable for traders who prefer trading on regulated exchanges with less speculation and access to the greatest amount of leverage.
So which should you go for in 2023? - Forex or stocks? When debating stocks vs Forex trading, the bottom line is always to stick with what works. This means going with what works best 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, Forex may suit you better. If you don't have a particular inclination, but are mindful of transaction costs, Forex might be the way to go.
But Can You Make Money Trading Forex?
Regardless of whether you choose stock market or Forex trading (or commodities), the most important part of trading is your strategy. A key aspect of your trading strategy is risk management. A sound trading strategy with complete risk management in the hands of a trader who does not trade on emotions is a good recipe for long term success in trading. Can you make money trading Forex? Can you make money trading stocks? It depends on your commitment to your strategy and trading education.
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 Admirals as we offer the ability to trade CFDs on Forex, ETFs, Stocks and more with a live account.
If this in depth look at stocks vs forex trading has you feeling inspired to start trading, or this article has provided some extra insight to your existing trading knowledge, you may be pleased to know that Admirals offers free webinars, where you can discover the latest trading trends, get actionable strategies and more! Click the link below to tune in now:
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