Forex vs stocks

Forex vs Stocks.

Finding success in the stock market can be difficult. Luckily, there’s a better way. Traders all over the world are switching to forex because of the many advantages of the forex market. With forex, you’ll discover 24-hour trading and high turnover volume. Plus, with the forex market, you can turn small movements into big opportunities (for profit or loss).

Should I Trade Forex or Stocks?

Opportunities – Trading Forex 24/5 means you can access the market for longer than the NYSE’s 8/5 operating hours. Simplicity – Eight major currency pairs account for the majority of market volume in Forex trading. Eight major S&P 500 stocks account for just 20%. Liquidity – Gauging movement in Forex could be easier due to increased market liquidity over stocks. Market Growth – Forex has been growing for the last 15 years whereas the stock market has returned to pre-2001 volume. Potential Profit / Loss – Small forex market movements can lead to large gains (or losses). The same movements with stocks can be relatively less impactful.

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Forex Vs. Stocks: Should You Trade Forex or Stocks?

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 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 such as.

. the well-established financial markets of Forex and stocks.

This article will consider the pros and cons of Forex and stock trading.

Forex market vs. stock market.

There is no hard and 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 get 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. stock market in terms of size, Forex takes the round.

Why do we care about the size?

The greater size of the Forex market gives it greater liquidity.

Forex or stocks: comparing liquidity.

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?

Well, 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 do 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.

On such an account, you might pay 1 pip of spread to trade EUR/USD and no commission.

Please note we have a selection of Account Types 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 this case of Forex vs. stock market, Forex has the upper hand.

The round-trip spread cost of trading the FX position is less than the market spread on the share.

. 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.

Narrow vs. wide focus.

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.

Relatively narrow metrics will 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…

. than on the performance of private sectors.

When you trade an FX pair, you are necessarily 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 may focus on technical strategies instead of looking at fundamentals.

Forex vs. stocks: trading times.

The FX market is a 24-hour market:

the market 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, extended trading sessions remain notably low volume and illiquid.

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.

Margin and leverage.

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 fully understand the risks involved.

Leverage can be a powerful tool but it can also put your activities to a quick stop.

Forex trading vs. stocks: our conclusion.

So which should you go for: Forex or stocks?

In trading, the bottom line is always 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…

. then 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 shares CFDs with MetaTrader 4 Supreme Edition.

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Risk warning: Trading Forex (foreign exchange) or CFDs (contracts for difference) on margin carries a high level of risk and may not be suitable for all investors. There is a possibility that you may sustain a loss equal to or greater than your entire investment. Therefore, you should not invest or risk money that you cannot afford to lose. Before using Admiral Markets UK Ltd or Admiral Markets AS’ services, please acknowledge all of the risks associated with trading.

The content of this website must not be construed as personal advice. We recommend that you seek advice from an independent financial advisor.

All references on this site to ‘Admiral Markets’ refer jointly to Admiral Markets UK Ltd and Admiral Markets AS. Admiral Markets’ investment firms are fully owned by Admiral Markets Group AS.

Admiral Markets UK Ltd is registered in England and Wales under Companies House – registration number 08171762. Admiral Markets UK Ltd is authorised and regulated by the Financial Conduct Authority (FCA) – registration number 595450. The registered office for Admiral Markets UK Ltd is: 16 St. Clare Street, London, EC3N 1LQ, United Kingdom.

Admiral Markets AS is registered in Estonia – commercial registry number 10932555. Admiral Markets AS is authorised and regulated by the Estonian Financial Supervision Authority (EFSA) – activity license number 4.1-1/46. The registered office for Admiral Markets AS is: Ahtri 6A, 10151 Tallinn, Estonia.

Should You Trade Forex Or Stocks?

Today's investors and active traders have access to a growing number of trading instruments, from tried-and-true blue chips and industrials, to the fast-paced futures and forex markets. Deciding which of these markets to trade can be complicated, and many factors need to be considered in order to make the best choice.

The most important element may be the trader's or investor's risk tolerance and trading style. For example, buy-and-hold investors are often more suited to participating in the stock market, while short-term traders, including swing, day and scalp traders, may prefer markets where price volatility is more pronounced. In this article, we'll compare investing in the forex market to buying into blue chip stocks, indexes and industrials. (Learn about the forex market and get to know some beginner trading strategies; check out Forex Trading: A Beginner's Guide .)

The foreign exchange market is the world's largest financial market, accounting for more than $4 trillion in average traded value each day as of 2011. Many traders are attracted to the forex market because of its high liquidity, around-the-clock trading and the amount of leverage that is afforded to participants.

Blue chips, on the other hand, are stocks from well-established and financially sound companies. These stocks are generally able to operate profitably during challenging economic conditions, and have a history of paying dividends. Blue chips are generally considered to be less volatile than many other investments, and are often used to provide steady growth potential to investors' portfolios.

Want to start trading stocks? Check out which online broker offers the best tools here.

Volatility is a measure of short-term price fluctuations. While some traders, particularly short-term and day traders, rely on volatility in order to profit from quick price swings in the market, other traders are more comfortable with less volatile and less risky investments. As such, many short-term traders are attracted to the forex markets, while buy-and-hold investors may prefer the stability offered by blue chips.

Leverage is another consideration. In the United States, investors generally have access to 2:1 leverage for stocks. The forex market offers a substantially higher leverage of up to 50:1, and in parts of the world even higher leverage is available. Is all this leverage a good thing? Not necessarily. While it certainly provides the springboard to build equity with a very small investment - forex accounts can be opened with as little as $100 - leverage can just as easily destroy a trading account. (For more insight, see Forex Leverage: A Double-Edged Sword .)

Another consideration in choosing a trading instrument is the time period that each is traded. Trading sessions for stocks are limited to exchange hours, generally 9:30am to 4pm Eastern Standard Time, Monday through Friday with the exception of market holidays. The forex market, on the other hand, remains active round-the-clock from 5pm EST Sunday, through 5pm EST Friday, opening in Sydney, then traveling around the world to Tokyo, London and New York. The flexibility to trade during U. S. Asian and European markets, with good liquidity virtually any time of day, is an added bonus to traders whose schedules would otherwise limit their trading activity. (Just because the forex market trades 24 hours a day doesn't mean you have to. See How To Set A Forex Trading Schedule .)

Stock market indexes are a combination of similar stocks, which can be used as a benchmark for a particular portfolio or the broad market. In the U. S. financial markets, major indexes include the Dow Jones Industrial Average (DJIA), the Nasdaq Composite Index, the Standard & Poor's 500 Index (S&P 500) and the Russell 2000. The indexes provide traders and investors with an important method of gauging the movement of the overall market.

A range of products provide traders and investors broad market exposure through stock market indexes. Exchange-traded funds (ETFs) based on stock market indexes, such as S&P Depository Receipts (SPY) and the Nasdaq-100 (QQQQ), are widely traded. Stock index futures and e-mini index futures are other popular instruments based on the underlying indexes. The e-minis boast strong liquidity and have become favorites among short-term traders because of favorable average daily price ranges. In addition, the contract size is much more affordable than the full-sized stock index futures contracts. The e-minis, including the e-mini S&P 500, the e-mini Nasdaq 100, the e-mini Russell 2000 and the mini-sized Dow Futures are traded around the clock on all-electronic, transparent networks. (To learn more, check out Forex Minis Shrink Risk Exposure .)

The volatility and liquidity of the e-mini contracts is enjoyed by the many short-term traders who participate in stock market indexes. The major equity index futures trade at an average daily notional value of $145 billion, exceeding the combined traded dollar volume of the underlying 500 stocks. The average daily range in price movement of the e-mini contracts affords great opportunity for profiting from short-term market moves.

While the average daily traded value pales in comparison to that of the forex markets, the e-minis provide many of the same perks that are available to forex traders, including reliable liquidity, daily average price movement quotes that are conducive to short-term profits, and trading outside of regular U. S. market hours.

Futures traders can use large amounts of leverage similar to that available to forex traders. With futures, the leverage is referred to as margin, a mandatory deposit that can be used by a broker to cover account losses. Minimum margin requirements are set by the exchanges where the contracts are traded, and can be as little as 5% of the contract's value. Brokers may choose to require higher margin amounts. Like forex, then, futures traders have the ability to trade in large position sizes with a small investment, creating the opportunity to enjoy huge gains - or suffer devastating losses.

While trading does exist nearly around the clock for the electronically traded e-minis (trading ceases for about an hour a day to enable institutional investors to value their positions), the volume may be lower than the forex market, and liquidity during off-market hours could be a concern depending on the particular contract and time of day.

While outside the scope of this article, it should be noted that various trading instruments are treated differently at tax time. Short-term gains on futures contracts, for example, may be eligible for lower tax rates than short-term gains on stocks. In addition, active traders may be eligible to choose the mark-to-market (MTM) status for IRS purposes, which allows deductions for trading-related expenses, such as platform fees or education. In order to claim MTM status, the IRS expects trading to be the individual's primary business; IRS Publication 550 and Revenue Procedure 99-17 cover the basic guidelines on how to properly qualify as a trader for tax purposes. It is strongly recommended that traders and investors seek the advice and expertise of a qualified accountant or other tax specialist to most favorably manage investment activities and related tax liabilities. (Trading forex can make for a confusing time organizing your taxes. These simple steps will keep everything straight. Check out Forex Taxation Basics .)

The internet and electronic trading have opened the doors to active traders and investors around the world to participate in a growing variety of markets. The decision to trade stocks, forex or futures contracts is often based on risk tolerance, account size and convenience. If an active trader is not available during regular market hours to enter, exit or properly manage trades, stocks are not the best option. However, if an investor's market strategy is to buy and hold for the long term, generating steady growth and earning dividends, stocks are a practical choice. Regardless of which instrument(s) a trader or investor selects, the decision should be based on which is the best fit.

Forex Trading Vs. Stock Trading.

One of the biggest reasons some traders prefer the forex to the stock market is forex leverage. Below, we compare the differences between stock trading and forex trading.

In stock trading, you can normally trade with a maximum of two to one leveraging. There are also some qualifying requirements before you can do this. Not every investor is approved for a margin account, which is what you need in order to leverage in the stock market.

Forex trading is very different. To qualify to trade with leverage, you simply open a forex trading account. There are no qualifying requirements. In the United States, you're limited to 50:1 leveraging, but in other countries, you can leverage as much as 200:1.

Liquidity Differences.

When you trade stocks, you are buying shares of companies that cost anywhere from a few dollars to hundreds of dollars. Market price varies with supply and demand. Trading on the forex is a different world. Although the supply of a country's currency can fluctuate, there is always a large amount of currency available to trade. In consequence, all major world currencies are highly liquid.

Paired Trades.

In currency trading, currencies are always quoted in pairs, so not only do you have to be concerned with the economic health of the country whose currency you are trading, but also with the economic health of the country you are trading against.

Your fundamental concerns also differ from one market to another. When you buy shares of Intel, your primary concern is whether the stock will increase in value -- you're less concerned with the stock prices of other companies When you're buying or selling on the forex, on the other hand, you have to consider the economics of two countries.

Does one country have more job growth than another, or better GDP, or political prospects? Therefore a successful single trade on the Forex requires analyzing two financial entities, not one. Forex markets sometimes exhibit greater sensitivity to emerging political and economic situations in other countries; the U. S. stock market isn't immune but is usually less sensitive to such foreign issues.

Price Sensitivity to Trade Activity.

The two markets have very different price sensitivity to trade activity. A stock purchase of 10,000 shares may impact the stock price, particularly for smaller corporations with fewer shares outstanding than, for instance, giants like Apple.

In sharp contrast, forex trades of several hundred million dollars in a major currency will most likely have little effect on the currency's market price and may have none.

Market Accessibility.

Currency markets have greater access than stock markets. Although in the 21st century it's possible to trade stocks 24 hours a day, five days a week, it's not particularly easy. Most retail investors trade through a U. S. brokerage with one major trading period daily, from 9:30 AM to 4:00 PM, with a much smaller "after hours" trading market with known volatility and price issues that discourage many retail investors from using it.

Forex trading, on the contrary, can be done six days a week, 24 hours a day, because there are many forex exchanges worldwide -- it's always trading time in one time zone or another.

No Bear Markets in Forex Trading.

When a stock market declines, you can make money by shorting, but this imposes additional risks, one of them being that (at least in theory) you may have unlimited losses. In reality, that's unlikely to happen -- at some point, your broker will end the short position. Nevertheless, most financial advisors caution against shorting for all but the most experienced investors, many of whom execute parallel stop-loss and limit orders to contain this risk.

In forex trading, you can go short on a currency pair as easily as you can go long and the two positions present similar risks. No additional precautionary trades to limit losses are necessary.

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Greater Freedom From Regulation.

Stock trading on major exchanges has many regulations and limits; forex trading is less regulated. In some ways, the regulatory environment of the major stock exchanges imposes limits you may not welcome; it also protects you and other investors to a degree the forex does not.

It's Your Choice.

Most investors are more familiar with the stock market than with forex, and that familiarity may be comforting. The comparative freedom from regulation on the forex and its high degree of possible leveraging makes it easy to control large trades without special qualifications and with a limited amount of money. That's the upside of the forex market, but also the downside -- participation in the Forex increases both investment opportunities and risk.