Obtaining high profits is the main driver of investors and traders when choosing assets for trading. That is why assessing the profitability of each asset is one of the first tasks that a trader must complete. Of course, the expected gains depend not only on the potential inherent in each of the assets but also on the trader’s willingness to pay attention to mastering technical and fundamental analysis, the time they are willing to devote to studying analytical reports and monitoring markets, etc. But there is still some underlying difference between Forex and stocks, which may influence your choice. Read the article to understand the advantages of Forex trading vs stock trading and determine which markets you are more inclined to trade on.
Difference Between Forex Trading and Stock Trading
If you are focused on making a profit, then at some point, you will inevitably come to the choice of Forex vs stocks. Why do these two assets make traders think for so long if there are also precious metals, commodities, energy, many derivatives, etc.? The reason is simple — with such a huge number of markets, most traders still choose to trade currency pairs or company shares. This is why these markets have the greatest liquidity of all others. They offer many opportunities to earn money if you have mastered the tools that allow you to predict market movements and trend reversals. If you are making your first choice or have already tried trading one of these assets and want to focus on another, consider the most essential factors that can influence your decision.
Forex vs. Stocks: Market Hours and Accessibility
Access to digital platforms has allowed people of many professions to feel themselves more free. They can do their job at any time, caring more about the result than being strictly tied to working hours. In this regard, a comparison of Forex vs stock trading indicates that FX is moving in line with modern trends and gives traders much more freedom. It works all day around and takes a break only on weekends. That is why you can choose any time convenient for you to trade currencies during the 5 days of a week. And when you are tired or want to switch to some other activity, the best Forex robots will continue to place and close orders for you in accordance with your chosen strategy. Therefore, you can make a profit 24 hours a day, 5 days a week.
The stock market is more conservative because traders are tied to the exchanges on which stocks are registered. This significantly narrows the time frame for trading activity and provides fewer chances for making money. Moreover, this is very inconvenient if the exchange on which your shares are traded is located in a different time zone. In this case, the trader has to give up their natural biological rhythms, which can negatively affect their health.
Forex vs. Stocks: Liquidity and Volume
High liquidity is one of the key indicators of possible success in the market because it is thanks to the intensive turnover of an asset that orders can be executed immediately. If the market has low liquidity with low trading volumes, you can open orders, but it will be difficult to execute them at your intended price because there will be few traders on the market willing to buy your asset or sell it to you.
In this regard, a comparison of the stock market vs Forex shows significantly lower volume indicators for stocks:
- Daily Forex trading volume averages around $5 trillion.
- The same figure for the stock market does not exceed $200 billion per day.
You can determine liquidity for the stock vs Forex market if you pay attention to the spread:
- If the spread is narrow for a long time, then you are dealing with a highly liquid asset. In this case, sellers and buyers quickly come to an agreement on the price of the asset being traded.
- If the spread is wide, the liquidity of such an asset is low, and you should think about other markets or tradable assets.
If you are still wondering what to choose, Forex or stocks, think about the fact that a highly liquid market allows you to carry out many trading operations per day. This means your profit will be many times greater than in a low-liquid market.
Market Participants
When choosing Forex trading vs stock market, also pay attention to market participants.
In the case of Forex, you will be dealing with a decentralized network of participants that embrace the entire world. This is because while there are some of the most popular trading pairs in Forex, you can potentially trade any currency as long as you find buyers and sellers. In addition to individual traders, investment and central banks, commercial companies, various funds, and other participants come to Forex.
The circle of stock market participants is narrower. There are significantly fewer shareholders, and the market is less populated, although the trading process involves a variety of companies, investors, market intermediaries, and other interested individual participants and organizations.
Risk and Leverage
One of the mechanisms for increasing profits is trading with leverage. In this case, even with a small deposit in your account, you can make a significant profit, since you are trading using funds borrowed from the broker. That is why you should compare the two assets in relation to leverages offered by brokers. Forex vs stocks which is more profitable if you take into account trading with leverage?
- If you are trading stocks or derivatives, then in most cases, traders will opt for a 1:10 leverage, since large values entail too much risk for both the trader and the broker.
- In Forex, brokers offer significantly higher leverage. It can be 1:50, 1:100, or even 1:1000. At the same time, risks also exist, and novice traders should not chase too big leverage. However, the probability of success on FX is higher, which is why brokers are not afraid to give their clients the opportunity to borrow such large funds from them.
Forex vs. Stocks: Trading Strategies
If you are a fairly active trader, you will see differences in the stock market vs Forex market regarding the trading strategies you can use.
- The Forex market is more volatile, which means there will be many more opportunities to make money from price differences. Since the value of a currency can change rapidly depending on various factors, including economic news, politics, and geopolitics, a trader can employ many strategies to maximize their profits by following scalping, swing trading, day trading, etc.
- The stock market is more stable, making this asset a better investment when you're looking to make a profit over the long term. For active trading, this is a less convenient tool, since the difference between Forex trading and stock trading is that ultra-short time frames are good for making a profit on Forex but not on the stock market.
Regulation and Oversight
The methods of regulating stock trading vs Forex trading also differ markedly, since even the most famous stock markets have not reached the same level of popularity and global coverage as Forex. Therefore, exchanges are supervised at the level of national or local legislation. And regarding the Forex market, the regulation is conducted by thirty various regulatory bodies at both the international and national levels. This also demonstrates the importance of Forex trading vs stocks and attracts traders with a high level of protection from regulatory authorities.
Tax Considerations
The authorities consider profits from Forex and stocks as taxable income. The percentage of tax charged depends on various factors. For example, Forex traders can choose tax rules, according to which they will contribute the required amount to the national budget. The tax on trading shares is calculated according to certain timeframes, and the general sum depends on how long you hold them before selling. The common point for Forex vs stocks trading is that if you have incurred any losses from trading, you can report this on your return to reduce your taxable amount.
Forex vs. Stocks: Pros and Cons
To sum it up, is Forex better than stocks? Having carefully examined the features of trading in each of these markets, we can summarize the pros and cons of choosing currency pairs or stocks for trading:
FOREX SUMMARY
Pros of Forex
- Comfortable work schedule, thanks to which you can connect to the trading terminal at any time on a weekday to place orders.
- High liquidity and market volume, thanks to which you are guaranteed to be able to close your orders almost instantly.
- High leverage, which makes it possible to make good profits even with a small deposit.
Cons of Forex
- Tough competition forces you to constantly improve your knowledge to succeed against advanced competitors.
- The need to take into account more factors that can affect the price of a currency compared to the price of shares.
STOCKS SUMMARY
Pros of Stocks
- The opportunity to use shares of reputable companies as a source of passive income.
- Possibility to pay less attention to trading if you buy shares for long-term investments and receive dividends.
- The feeling of involvement with the companies' activities.
Cons of Stocks
- Poor protection in the event of a company bankruptcy.
- The need to adjust your daily routine to the opening hours of stock exchanges.
- High competition due to which profitable shares of leading companies will be difficult to buy, and shares of low-profit businesses will not give you high profits.
Choosing the Right Market
The significant difference between Forex and stock market will tell you on which market to start trading. Also, if you have already tried to trade one of these assets, knowing these nuances will help you decide whether to switch to another one or whether it is better to stay with the one you already know:
- If you like to freely manage your time, it is better to choose Forex. Moreover, you can use the best FX robots that will perform many operations for you.
- If trading is not your main activity but a passive source of income, it is better to choose stocks. But in this case, buy shares of only reliable companies.
- If you are not afraid to take risks, trade Forex because brokers provide huge leverage for daring traders.
- If you want to support the development of some companies and believe in their prospects, buy their shares for profitable resale in the future.
Conclusion
Having compared trading on Forex and the stock market on a variety of indicators, we can definitely say that FX provides more opportunities for making a profit. But only if you are willing to delve into the nuances of fundamental and technical analysis, follow the news, read analytical reports, etc. Also, you can use advanced Forex robots, which were developed with all this knowledge.
In addition to the question of profit, traders are interested in other characteristics that distinguish trading these two assets. For example, is Forex trading easier than stocks? Which market has more risks? We will cover this in detail in our next articles to give a comprehensive picture of the differences between stock trading and Forex trading.
