Anyone new to trading is likely to wonder which is better to trade – Forex or stocks. Let's begin answering our question with some basic economics.
Today, we are 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 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.
Enter, the well-established financial markets of Forex and stocks.
There is no hard and fast rule regarding whether it's better to trade Forex or stocks. When comparing them, you'll find each has benefits and drawbacks. It ultimately comes down to how important those features are to you personally.
So, let's get started with the Forex market, which is:
Meanwhile, stock market is the overarching name for the combined group of buyers and sellers of shares or stocks.
As the name suggests, shares in a company represent a share in the ownership. The buying and selling of stocks is usually conducted on stock exchanges. And 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 was mostly conducted by "open outcry", but the trend in recent years is 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.
Why does size matter? The greater size of the Forex market – gives it greater liquidity.
The Forex market is extremely liquid. This is due to the numerous participants that are 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, stock liquidity drops significantly.
Why do we care about liquidity?
Well, liquidity makes it easier to trade an instrument. Generally speaking, superior liquidity means proportionally tighter spreads and lower transaction costs.
Let's do an actual Forex trading vs. stock trading example and compare some typical costs. We will use Microsoft as our liquid share and EUR/USD as our liquid currency pair.
For Microsoft, the trading cost would be paying market spread and commission to your broker, and the price is currently around $52 a share. Also, the market spread typically ranges from 2 to 5 cents 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. Admiral.Markets is one example of an account type offering this set-up. On such an account, you might pay 1 pip of spread to trade EUR/USD and no commission. 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%.
So in this round of Forex vs. stock market, Forex wins. The holistic spread cost of trading the FX position is less than the market spread on the share. But there's still more advantage for Forex traders, because once you factor in the share commission, FX trading is even more cost-effective.
You can also view real market prices via our demo trading account.
See for yourself how the spreads compare.
Another key difference between trading Forex vs. stocks is the scope of the trader's focus. When looking at an individual share, you can concentrate 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 like the company's debt levels, cash flow and earnings guidance will also be important. 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 on general indicators such as unemployment, inflation and GDP rather than 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 factors in the performance of not just one economy, but two.
Of course, you can also focus on technical strategies instead of looking at fundamentals.
The FX market is a 24-hour market. It has no single central location, its participants spread across the globe, and it's always open somewhere in the world during business hours.
On the other hand, trading a listed stock is mostly limited. 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 can now sometimes participate during pre-market and after-market trading periods. These periods were once the domain of institutional investors only.
Electronic advances have made stock trading increasingly accessible for retail investors too.
The catch is, extended trading sessions remain notably low volume and low liquidity. If you are looking to trade at any given time, Forex is your best choice.
Another big advantage of trading Forex over stocks 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 leverage offered is 1:10.
But it is not unusual for FX brokers to offer 1:50 leverage. Admiral Markets offers leverage up to 1:500.
This means a trader can conveniently command a larger position for a given cash deposit. But bear in mind that when trading with high leverage, you need to know big your underlying position actually is, and fully understand the risks involved.
Leverage can be a powerful tool, but it can also quickly end your trading activity.
So, do you now know whether you'll choose to trade with Forex or with stocks? If not, don't worry – there's no right or wrong answer.
In trading, the bottom line is always to stick with what works for you. For example, if you know more about one market than the other, you should probably stay in your area of expertise. If you're interested in individual companies, it might make sense to trade stocks.
On the other hand, if you think more in terms of macroeconomics or don't have a particular inclination other than transaction costs, FX may work best. With Forex trading, you can gain an edge through platforms like MetaTrader 4 Supreme Edition.
There's a lot of might and maybe in our examples, we don't know what will work best for you. It is up to you to experiment and find out, just be sure to test it out in a risk-free environment first.