Forex and stock markets are among the biggest and most popular financial markets. However, they both have numerous nuances that make decision making difficult for new would-be investors. Hence, it is extremely natural to wonder which one is harder, Forex or stocks?
ٌForex isn’t necessarily harder than stocks. It all depends on your trading style and goals. Both markets are easy to enter, but they’re different in market forces, liquidity, risks, and price. Forex requires considering broader market forces, but investment options in stocks are more confusing.
Throughout this article, we’ll elaborate on the similarities and differences between Forex and stocks trading to help you decide which one better matches your preferences and goals.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Stocks vs. Forex: Similarities and Differences
Forex trading or currency trading refers to buying and selling currencies based on differences in exchange rates. So, when a currency’s value is lower than another, the trader buys it, and when it goes up in value, they sell it.
On the other hand, stock trading is the process of buying and selling a company’s shares or stocks. So, you’ll own a small piece of that company when you buy a company’s stock. In this market, too, traders buy low and sell high.
Entering both trading venues is pretty straightforward, thanks to technological developments. You can choose a broker, set up your account, and start trading within days. Other internal workings determine which one is easier.
The first few factors are your preferences, personality, risk appetite, and goals. For example, if you want to invest for the long term and don’t mind waiting for months or even years, then the stock market is better for you. However, it’s not that simple. To decide which one is easier, you should know the differences between the two markets.
Market Forces
The main factor affecting your trading simplicity is the forces that determine market prices. In addition to the supply and demand, other forces move prices, too.
In the stock market, a company’s shares fluctuate according to management changes, performance in the market, or overall economic conditions. Cash flows, debts, and earnings are also important elements affecting a company’s stock value.
With Forex, the market influences are much wider, usually on a national level. A national currency’s value can change due to a country’s political stance, unemployment, state officials’ decisions, inflation, and even natural disasters. Since you trade pairs of currencies, you should consider all these aspects in both countries.
Liquidity
By liquidity, we mean the number of traders in the market or the market size. The larger the market size, the easier it is to trade because you’re more likely to find a trader who buys your asset.
So, as the most liquid market in the world, you’ll have a better chance of finding someone to trade with in Forex. However, it’s not all about the market size and can also depend on market conditions and the pair you want to trade.
The liquidity issue is more salient with stock markets. Companies have different trade volumes. The shares of unknown firms or new startups may be difficult to trade, so you may not easily find a trader.
Price Fluctuations
Market prices change at varying degrees and speeds. This feature, called volatility, directly determines how easy you can trade in a market. For example, Forex is highly volatile due to its high liquidity. Plus, its prices fluctuate a lot in reaction to economic, political, and social events. That’s why Forex traders need to stay on top of the news to get ahead of the market.
On the other hand, the stock market is more stable. So, you can track price patterns more easily, especially with blue-chip stocks (i.e., the stocks of well-established companies like Facebook and Google). However, it’s not to say the market doesn’t experience drastic price fluctuations. Political changes within a country can affect the stock market, too.
Irrespective of your market, volatility presents both risks and opportunities. While you can take advantage of price fluctuations to make more profit, you should always watch for risks to avoid losing money.
Short-Selling or Long-Selling
No matter your market, you normally expect the prices to go up and sell your stock, but the opposite is also possible in Forex. Traders can invest in a currency’s price going down relative to another currency. This strategy is called short selling, as opposed to long-selling, which relies on the prices going up.
Unlike the stock market, the ability to trade regardless of the market movement’s direction provides more opportunities for traders in the Forex market.
Trading Options
Although more than 170 currencies make up the Forex market, only a few currency pairs are widely traded (no more than eight pairs). It translates into limited trading options, which can be an advantage since you don’t get overwhelmed. Traders can even specialize in one currency pair and have a more focused trading pattern.
The stock market includes thousands of companies and shares to choose from, which is not easy. Some traders examine a limited number of stocks, pick a few of them, and stick to them.
Leverage
Leverage is a big upside when it comes to currency trading. Forex brokers offer superior leverage, which is an excellent opportunity for traders with insufficient capital. Forex traders can reach up to 1000 times their money, depending on their accounts, trading history, brokerage, and region. It means, if they have $1, they can multiply it to $1000, similar to a loan given by brokers.
With stock trading, you don’t have this much leverage. Traders can get 2:1 leverage, if any. So, they don’t have much chance of increasing their equity with low investment.
Commissions
When it comes to commissions, the Forex is more cost-effective. Its brokers don’t charge any commissions, with fixed spreads on currencies being the only fee they incur.
Stock traders have to pay a commission when they open and close a trade, in addition to the spreads they pay. Spreads are the difference between a currency pair’s buy and sell prices.
Trading Styles
Although you can go about trading in any way you want, each market lends itself to one trading style better than others.
Short-term trading involves making a profit from small price fluctuations by opening and closing trades in a few minutes. This style is better for Forex trading because it doesn’t cost much to take positions.
Long-term trading is more suitable for stock trading due to lower volatility. In this style, traders hold long-term positions that take months or even years.
Trading Hours
Market trading hours greatly influence your profit potential because it determines the amount of time you monitor the markets.
Forex is open 24/7, five days a week, making it accessible to traders with lots of trading opportunities, but it requires more monitoring time since the market-moving risk is higher.
That’s why Forex traders should have a sound risk-management strategy with stop-loss orders to avoid considerable losses.
Unlike Forex, the stock markets center around specific time zones in which they’re located. Plus, they only work for 8 hours a day on weekdays. That will make it more limited for trading, especially if you live in a different time zone.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
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Conclusion
The Forex market is more liquid, more available during the week, and has better leverage. Also, since its trading options are more limited than stocks, traders need less research to decide what to trade.
On the other hand, stocks are subject to fewer market forces as you trade a single company’s share. So, it tends to be more stable than Forex.
However, eventually, it’s up to you to decide which market is better for you depending on what you aim to achieve.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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