Forex vs Stocks, which is more profitable? • Benzinga


To the untrained eye, the stock market and the forex market may look identical. Although these two popular financial markets share many similarities, there are many differences between forex and stocks.

This article compares these markets to help traders decide which one 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 in pairs, they oppose each other, creating an oscillating ratio. These oscillations occur due to changes in the supply and demand of currencies – usually driven by fundamental events that influence the market in question. Examples include the US unemployment report, the Bank of England interest rate decision and the EU GDP projections.

In this environment, traders attempt to successfully predict price movement through fundamental or technical analysis and profit by buying the currency that is expected to appreciate or selling the currency that is expected to depreciate.

Advantages and disadvantages of Forex trading

Forex trading has been around for decades and its pros and cons are well documented. Consider the following.

Advantages of Forex

  • Market 24 hours a day, 5 days a week: The forex market trades 24 hours a day, 5 days a week. Regardless of their location, traders always have access to the market.
  • Low cost: For traders who want to start with modest capital, forex trading can be cheap, especially if they only trade 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 cost but also eliminates scalability issues.
  • High leverage: Forex brokers offer higher leverage than other markets. Usually it is up to 1:50 or even more at some offshore brokers.

Disadvantages of Forex

  • More challenging business environment: The biggest traders in the forex market are financial institutions which are better informed and prepared than retail traders.
  • High risk: The foreign exchange market can be very volatile. Combined with higher leverage, it can be dangerous for any trader.
  • Lighter regulations: Forex is traded over-the-counter (OTC), so there is no centralized exchange. Thus, regulatory oversight is somewhat limited and traders should do their due diligence before engaging with a broker.
  • Lack of performance: With the exception of more complex strategies such as the “carry trade”, forex offers no dividend payouts like the stock market, which limits passive capital growth.

What is stock trading?

Stock trading involves buying or selling shares of a publicly traded company to generate profits. Profitable stock trading relies on correct price prediction to take positions before the predicted move occurs.

For this 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 the two.

Advantages and disadvantages of stock trading

Stock trading is quintessential, as it has been around for centuries. Here are some of its competing qualities.

Benefits of shares

  • Historical Growth: Stocks grow with an economy, providing a positive upward bias. For equity indices like the S&P 500, this growth has averaged around 10% (pre-tax).
  • Passive Income Opportunity: Many profitable companies pay dividends and distribute part of their profits to shareholders. For some industries like real estate, this can be double digits, providing a significant passive income opportunity.
  • Convenience: In modern times, it is convenient to trade stocks from any smart device. Calling brokers and waiting for the quote is a thing of the past – nowadays everything works automatically in seconds.
  • Liquidity: The stock market is relatively liquid unless you are trading penny stocks. Market depth ensures high scalability and low costs. You are unlikely to have any problems trading blue chip stocks.

Disadvantages of stocks

  • Risk: Companies can go bankrupt and completely wipe out shareholders since they are the last to be compensated (after creditors) if there is anything left.
  • Emotional volatility: Stock prices can go up and down, causing emotions ranging from fear to greed. This volatility can be taxing even for experienced traders.
  • Competitiveness: Stock traders compete with institutions with more resources, time, and often dedicated research teams.
  • Long: Finding good stock market opportunities takes time because every listed company is a world apart.

Differences between Forex trading and stock trading

Despite many similarities, forex vs stocks trading has some significant differences.

Leverage

Stock brokers offer modest leverage, up to 1:2, in accordance with T regulations. On the other hand, forex brokers can offer leverage up to 1:50, and for brokers offshore it may even be 1:500 or more.

Trading hours

The Forex market begins trading with an Australian market opening on Sunday and trading 24 hours a day until the US market closes on Friday afternoon. During this time, the stock market is open for a much shorter time. For the US stock market, that’s between 9:30 a.m. and 4 p.m. ET.

Market size

The foreign exchange market is one of the largest in the world, with a daily volume of over $6.6 trillion. Meanwhile, the stock market is much smaller, with the combined volume of the New York Stock Exchange, Nasdaq, and Chicago Board Options Exchange not exceeding $300 billion.

Similarities Between Forex Trading and Stock Trading

The stock and forex markets have considerable similarities, which makes it attractive for traders to switch from one to the other.

Brokers

Regardless of the market, almost all non-institutional traders operate through brokers – regulated intermediaries who execute trades on their behalf. Although there are specialist brokers, many large brokers offer both stocks and currencies, making it easy for traders to switch to the market they find most appealing.

Short term trading

Short term or intraday trading relies on patterns, momentum and relative strength. These concepts are permanent and transferable from one market to another.

Technical analysis

Technical analysis relies on identifying and analyzing patterns that repeat over time, seeking to find reliable patterns that produce profitable long-term results. Many technical concepts like support and resistance, divergence or Elliot wave theory apply perfectly in any market, including stocks and forex.

Forex versus stocks, which is the most profitable?

Choosing between forex and stocks is a matter of trading style, lifestyle, and trading goals. Short-term intraday traders should consider their location, as US stock market trading hours are not as convenient from some parts of the world, while the forex market is more accessible due to its trading hours .

However, business goals will make an even bigger difference. For a trader who likes volatility and goes long as well as short, forex will be more profitable, but with higher risk due to higher leverage.

Meanwhile, for those focused on the long term and looking for passive return, the stock market will be a better bet regardless of location.

When it comes to forex versus stocks, it all depends on your goals and which market is right for you.

Best Forex Trading Platforms

Forex trading is best done through quality brokers – regulated intermediaries who buy or sell currencies on your behalf. In the table below you will find Benzinga’s selection of the best forex trading platforms.

Claim exclusive offers

  • CedarFX is not regulated by any major financial agency. The brokerage is owned by Cedar LLC and is based in St. Vincent and the Grenadines.

  • Minimum account

    AUD$200 or equivalent

  • Minimum account

    US$100 (or equivalent)

  • eToro USA LLC; Investments are subject to market risk, including possible loss of principal.

Best Stock Trading Platforms

Newbie traders can be overwhelmed with a variety of platforms available for stock trading. Therefore, Benzinga has compiled a list of recommended stock trading platforms for any level of experience.

  • Best for

    Intermediate Traders and Investors

  • securely through the CenterPoint Securities website
  • Benzinga is compensated if you access certain of the products or services offered by eToro USA LLC and/or eToro USA Securities Inc. The testimonials contained in this communication may not be representative of the experiences of other eToro customers and such testimonials are not no guarantees for the future. performance or success.

  • Best for

    Global Global Broker for Short Selling

Frequently Asked Questions

questions and answers

Q

What are the risks of forex trading compared to stocks?

A

The forex market offers significantly higher leverage which reaches up to 1:50 or even more for offshore brokers. Combined with higher volatility, it’s tempting to overextend and end up with big losses. Additionally, the forex market trades around the clock, which makes it more difficult to monitor.

Q

Do stocks or forex have the highest levels of volatility?

A

Forex is more volatile than the stock market since currencies are traded in pairs, which puts them under the influence of multiple political, social and economic factors on a daily basis.

Q

What are the riskiest stocks or forex?

A

Forex is generally more risky because 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, which makes it more tempting for inexperienced traders.


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