Forex vs Stocks: Understanding The Differences

November 20, 2021 at 09:33 AM

Every trader’s goal is to make as much money as possible in the financial markets. When they’re choosing which markets to trade in, traders will naturally ask themselves which markets present them with the best opportunity for profit. 

Two of the most popular markets are stocks and currencies. The main difference between trading Forex and trading stock is obviously, what you’re trading. With Forex, you’re buying and selling currencies, while with stocks, you’re dealing in shares, which are units of ownership in a company.

Here are a few other differences that can help you decide whether Forex or stocks are for you. 

Market size

The forex market is the largest financial and most liquid financial market in the world, even larger than the stock market. It has a daily volume of over 6 trillion USD. 

Volumes that are that big present traders with many advantages. It allows traders to sell and buy currencies quickly and easily. Traders can also get in and out of a position very easily, 24 hours a day, 5 and a half days a week. That means you’ll never be stuck holding a position because you can’t find a buyer. 

A bigger market size also creates tight spreads and more competitive quotes. 

Predictability

In the Forex market, currency prices constantly fluctuate based on supply and demand. When a currency such as the USD is being bought in large volumes, its value increases. When it’s being sold in large volumes, its value decreases. 

These lifts and dips in the currency markets are heavily influenced by financial market news, global economic data, macroeconomic forecasts, short term market volatility and portfolio flows. 

These are all very difficult to predict. 

Stock trading is a lot more straightforward. When you’re trading stocks, the most important thing you need to focus on is the value of your investments. Stock investors use the fundamentals of a company’s stock to forecast its future prices, like earning reports that take a lot of the guesswork out of forecasting. 

By contrast, there are more factors that affect the value of a country’s currency which makes the movement of currencies more difficult to predict than stock movement. 

Profitability 

When you’re looking at whether Forex or stocks are more profitable you really need to establish the context first. For example how much experience you have, what type of trader you are, what your profitability goals are. Then you’ll be better able to judge which market presents revenue potential for you. 

If you’re new to investing, don’t want to deal with high-risk scenarios, and want to reach your financial goals over the longer term, then stocks would be a more profitable option for you. 

If you’d prefer to be day trading, don’t mind taking some risk for higher rewards, and want to make quick returns over a shorter period of time, then you’d probably be more suited to Forex. That’s because in the Forex market there are lower capital requirements, and you can open and close trades within minutes, while also taking advantage of small price movements with leverage. Keep in mind, even if you are aiming for shorter-term gains, Forex will require an upfront time investment. You still need to have an understanding of the Forex market, know how to read technical analysis and have a fine-tuned, fool-proof trading strategy under your belt before you can see profits roll in. 

The more you know about the financial markets, the more likely you are to make informed choices about where to put your money, and that’s how you’re able to potentially profit when you’re trading and investing. 

A good way to get started is by practising with a virtual trading account. The hands-on experience will help you build the trading acumen you need, while you gain first-hand insight into the market you have more affinity with before you put your real money on the line. 

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