Many people often ask the question as to whether forex trading is better than stock trading or vice versa. The question is like comparing apples and oranges. Forex trading is very different to trading stocks and although price might look the same on a chart, there are some significant differences.
Just as some people apples while others prefer oranges, it is the same story with forex trading or stock trading.
Let’s take a look at some significant differences between forex and stock trading in order to better understand the question.
Forex and stocks are two completely different markets
Forex or the currency markets are very different from trading equity markets or the stock markets. As a result, both these markets require a somewhat different approach.
It is important to understand that while the forex markets trade nearly 23 hours a day, the equity markets trade for just eight hours or during business hours. This means that if you are a day trader, you need to adjust your trading to suite the trading hours if you want to trade stocks.
While forex deals with currencies, the stock markets deal with equities. Therefore, the fundamentals that drive both these markets are very different. For example, a central bank rate hike which can bring a lot of volatility to the currency markets can see a muted response for the stock markets. Likewise, a company’s earnings release has literally no impact on forex.
Leverage is different with forex and stock trading
Leverage, which is a big game changer plays an important role in forex trading. Without a 1:100 leverage or more, most retail forex traders would not be able to trade at all.
With stocks, the leverage can vary from one stock broker to another. However, you will not find stock trading with leverage of 1:100. That is unheard of. Of course, the exception here is stock CFD trading, which is completely different.
In forex, you can see many companies such as Forex broker JustForex which offers a fairly decent leverage to trade the currency markets.
While in forex, you can trade with micro lots, in stock trading, this is not the case. Buying one share of a stock is the bare minimum that you can buy. Most stock brokers also have a minimum limit on the number of shares you can buy which can further limit you.
Stock trading is mostly investing, forex trading is mostly speculation
Another major difference between the two is that stock trading often see’s big inflows into the market. Typically, you will find large pension funds, hedge funds and institutional banks trading in the equity markets.
Of course, there are some retail stock traders as well, but they are usually not the majority. One of the biggest reasons why one would trade the stocks is to invest in the long term. There are only a few subset of traders that trade the stock markets for the purpose of speculating.
With forex markets, especially the retail sector, you are only speculating. No retail trader would open a forex trading account in hopes to take physical settlement of the other currency they are buying or selling.
As a result, you can see that the way the forex markets and the stock markets behave are quite different.
Conclusion – Which is better? Forex or stock trading?
In conclusion, the best answer to this question is what your trading goal is. If you want to invest for the long term, then stock markets are your best choice. This will ensure that your capital grows steadily and you can make additional profits from dividends etc.
If you are a short term trader and a speculator, then trading in Forex makes for a better choice. Of course, bear in mind that the fundamentals that govern the forex and the stock markets are greatly different.