Forex vs Stock market: Which one is better and why
This blog explores the best approach and routes to trade, either Forex or the stock market.
Stocks are generally used for a longer-term investment. If you have a longer-term objective, you might want to fund a pension or, indeed, pay school fees. This could be your preferred approach if you can find stocks with decent balance sheets and fair price-earnings ratios with a good customer base and a solid business model.
On the other hand, if you have a short-term objective and you are looking to supplement your income, then Forex might be the preferred approach.
There are several reasons for you to become a full-time trader:
1. The time spent
The stock market consists of multiple stocks while the Forex market is made up of 10 different currency pairs, so you can spend less time analyzing an individual currency pair than the vast array of stocks. But if you’re able to do research and you’ve got the experience to analyze company data and balance sheets, then stocks can be very profitable.
If you’re inclined to be a fundamental trader who looks at the reasons why a stock or even a currency pair moves then trading stocks may be a preferred way to go, as the fundamentals are much easier to understand.
On the other hand, if you want to be a technical trader, then I would say that the Forex market might be easier.
2. Ease of access
The other thing that you need to consider is the ease of access. People that come into trading for the first time, have limited funds or only want to risk a small amount of money.
You can trade the Forex market with just a few hundred dollars, but it’s difficult to do that on the stock market because a lot of brokers won’t even allow you to open a trading account unless you’ve got a few thousand dollars.
The leverage that Forex offers is also very important. The recent ESMA regulations in Europe, pull down the leverage, but when you trade in the Forex market you have access to huge leverage, so you can start with just a thousand dollars.
If you’ve been trading 20:1 leverage, you’re putting yourself on the market for 20.000$. That’s not as easy to do when you’re trading the stock market. So, you need a higher amount of money to start with.
Leverage is more available on the Forex market than on the stock market, and you can certainly start experimenting with small amounts of money to see if you actually have what it takes to be a trader.
Also the cost of trading, generally speaking, is cheaper in the Forex market. You might just pay a small commission and the spread, but in stocks, it’s almost certain you’re going to spend money on the spread as well as a decent-sized commission.
3. Suitable for your lifestyle
The Forex market is open 24 hours a day, except for the weekends. Certain times of the day will be more liquid, but you can trade different currencies in different time zones. Also, you can fit it into your lifestyle if you’ve got a day job or you have a few spare hours in the evenings.
In general, stock markets are open from 8 to 4, so if you want to trade in the US stock market you have to be there at certain times.
4. The liquidity
The next thing you need to be looking at is liquidity. Usually significant liquidity is present in the main Forex pairs. That means you can always get out of a position without too much slippage whether it’s for a profit or a loss.
Often this liquidity is not necessarily available in the stock market, especially in the lower cap stocks, which means the slippage may be higher.
Sometimes you’re in a position you can’t get out of because the liquidity has dried up and you don’t necessarily get what you see on the computer. That risk will actually impact smaller accounts and the last thing you want to do is waste money on a mistake.
Needless to mention, small-cap stocks have higher liquidity, but usually, this means higher stock prices. If the stock price is higher, chances are you won’t be able to get a lot of exposure when you start trading with a smaller account.
5. Personal choice
In my opinion, if you’re inclined to be a technical trader looking at past price action and repeat patterns, you’re more angled to the Forex market. Why? Because the Forex market is the largest market on the planet, equates to 5 trillion dollars a day. The main levels of support and resistance are more valued in the Forex market as there are more players than there are on the stock market. That usually led me to be motivated more by fundamentals than technological aspects.
As I said, this is a personal choice. If you are more inclined to be a fundamental trader to analyze company balance sheets and look for price-earnings ratios and looking at markets in general, then your choice should be the stock market.
I hope you have found this valuable and if you would like to learn more, join me in the Trading Room. I hope to see you there!