Forex and stocks are two of the most profitable markets. Both are very volatile markets and have high trade frequency. New traders, and often professional trader ask this question to themselves that in the equilibrium of profits which is the better investment.
Here we will discuss both these financial markets, their characteristics, their advantages and disadvantages and what makes each one of them a better investment.
FOREX VS STOCK – THE BASICS
What is Forex?
The foreign exchange market is a decentralized, highly liquid market where you can trade one currency against another. This market includes traders/investors from around the globe. The major players of this market are investment banks, central banks, hedge funds, and commercial companies.
Currencies can be exchanged anywhere over-the-counter and can be traded 24 hours a day, 5 days a week.
What is Stock?
Stocks are shares of public listed companies which are traded on the stock exchange. A stock exchange is a marketplace where traders buy and sell stocks. Stock exchange provides a regulated and transparent platform to buyers and sellers for trading.
FOREX VS STOCKS – THE COMPARISON
|Forex Trading||Stock Trading|
|Total Value – $2.4 quadrillion||Total Value – $69 Trillion|
|Highly Liquid||Less Liquid|
|24-hour Market||8-hour Market|
|Minimal to zero commission||Commission percentage charged|
|Limited focus||Very broad focus|
As per the Visual Capitalist, there are 60 major exchanges in the world with a total value of $69 trillion.
|Continents||Percentage Share||Value (Trillion)|
The US Stock market holds the major chunk of this value, a total of 40.6%.
The forex Market is a huge market with a daily volume of $6.6 trillion, according to the 2019 Triennial Survey of turnover in OTC FX markets. The worldwide 2021 forex market is worth $2,409,000,000 ($2.409 quadrillion).
Some of the most popular currency pair which are exchanged are:
The US dollar is paired with more than 80% of the currencies being traded.
Large trading volume is beneficial for traders. This means that investors can easily get their trades executed and at a price of their preference. Moreover, having higher trade frequency means increased chances for investors to enter and exit the market.
A high trading volume means higher liquidity. The financial markets with high trade volumes mostly have higher liquidity compared to others.
In the stock market the trading frequency is divided amongst the multiple companies that are being traded. The stock of every company has different trading volume. Some have very low trading volume which makes it difficult to trade. The stock market has lower liquidity in comparison with forex market
The forex market, comparatively, has a handful of currencies. The trading volume is divided amongst these currency pairs, making the trading volume comparatively higher for each currency. Higher trading volume means higher liquidity.
The stock market has a limited hours where the stocks can be bought and sold. The opening and closing hours of different exchanges around the world can be viewed here.
A limited number of trading hours and different time zones of the stock exchanges around the world limits the options of trading for investors
Forex is an OTC market and is not traded over a traditional exchange. It is exchanged through the interbank market. Therefore, trading of currencies takes place all around the world according to their business hours and trading periods. As a result, a trader has virtual access to the forex market 24 hours a day, 5 days a week. This is a major advantage for traders as there are no trading gaps between the 5-day trading period
Stock trading requires the trader to pay commission to the broker for using the platform for stock trading.
In the forex market, majority of the brokers don’t charge commission. They earn/take benefit from the spread. Spread is the difference between the sell and buy price
Stock Market comprises of millions of public listed companies. For a trader, it is very difficult to monitor and focus on thousands of companies that run the index.
Forex market is focused on eight major currencies, which can be easily monitored and tracked.
The stock prices of company are majorly driven by the internal factors of the company, which includes company’s debt levels, cash flows and earnings. In addition to it, news about the company also drives the prices of the company stock up and down.
The forex market has a lot wider range of factors that influence the rates of currencies. The currency price is usually affected by the macroeconomic situation of the country, for example unemployment, inflation and gross domestic product (GDP), as well as news and political events.
Since currency is traded in pairs, as an investor you need to be have complete information about both the currencies: the one you are buying and the one you are selling. Hence knowledge about both the currencies is important before trading. Forex indicators are constructive in making disciplined and informed decisions.
PROS AND CONS OF BEING A FOREX TRADER
Accessibility– The forex market is the most accessible market because of its 24 hours trading period. Trading can be done online, through brokers, and they can access all the latest prices, news, price charts, tools and strategies.
Quick Returns – The forex market is extremely liquid and very fast in term of trading. The waiting period for the asset to grow in value is very less enabling the traders to earn quick returns.
Easy Short Selling – Currencies are always bought and sold in pairs. Investors who foresee a particular currency declining can easily sell that currency and buy another currency in return. There is no borrowing involved.
Ease of Analysis – Forex market can be easily predicted and analyzed using technical analysis. Technical analysis requires price history and trends that gives enough information about supply, demand and market sentiments.
Transparent Trading – Forex market is not much influenced by insider trading, as it is not centralized. This makes forex trading, very transparent.
Simple Tax Rules and Calculations – Forex trading holds no complex tax rules. The tax calculation is very easy and simple.
Uncertain Price Determination – Price determination process in the forex market is considered very complex. Trading is done on the basis of technical knowledge and analysis.
Risk – Forex Market is a high leverage market which makes it very risky.
Limited number of teachers – Forex traders usually are at a loss when it comes to guidance for trading in the forex markets. The market has very limited advisors and managers for forex trading.
High Volatility – High volatility is an advantage and a disadvantage both. Changes in government policies and economic situation can drastically affect the market making it difficult for investors to take risk.
PROS AND CONS OF BEING A STOCK TRADER
Massive Gains – In the long run, the stock market can build huge wealth for investors.
Simple Trading – You can easily invest in stocks that track the index like S&P 500 and get good returns without any hassle.
Start with very low money – You can start trading with just one share also. You don’t need ample amount of money to become a stock trader.
Stock Market grows with the economy – Stock Market and the economy goes side by side. During times when the economy is booming, stock market is the best place to invest and earn returns.
Profits can be earned in two ways – A stock trader can benefit from stock trading in two ways: 1) Appreciation in the value of the stock purchased 2) Profit from selling high and buying low
Diversify your portfolio – stock trading is the best way to diversify your portfolio. You can easily invest in long tern stocks that will earn you profit in the long run and can invest in short term stocks which you can trade daily and earn profit.
A lot of guidance and information is available – Stock traders can benefit from a lot of free knowledge that is available to them in order to start trading and search for good companies to invest in.
Earn through Dividends – Some of the companies regularly pay dividends to shareholders. It becomes a regular stream of income for traders. Some of the best Monthly Dividend Stocks to Buy in 2021 are listed here.
No guaranteed return – Stock Market is very unpredictable. There is no guarantee of any profit. Sometimes a stock can crash badly, making you lose your money.
You have to be a patient – In order to build a decent amount of wealth through trading, you need to wait for years. This becomes very difficult for majority of the people.
Volatility – Stock Market is very volatile. History have told many stories of stock market crashes stories and how people have lost their investments.
Without decent knowledge you cannot be a stock trader – Stock trading requires a good amount of knowledge about the stock market, the companies and how the index runs.
FOREX VS STOCKS. WHICH IS MORE PROFITABLE?
There is no simple answer to the above question. Choosing a financial instrument is not a simple task. As a trader, you need to take into account a lot of other factors which include: risk tolerance, trading goals, profit goals and long term/short term investment.
Firstly, the amount of risk you are willing to take as in investor should be your top selection criteria. Stock market holds a lot of companies which are low risk companies which grow with time. Whereas, Forex market is highly influenced by global politics and economy. These two factors are totally out of control and can make or break your investments.
Secondly, your trading goals as an investor are also of prime importance. Whether you are interested in long term investment or regular profits will further narrow down your selection of financial instrument. As an investor, you need to stay put and wait a while before you can benefit from your investment. Investing in value stocks is a long-term investment.
Thirdly, profit goals are also very important. They define your trading strategy and how to carry out your trades.
Last but not the least, your investment time period also matters. That is whether you are interested in long term investment or short-term investment.
Forex market is very volatile and is best if you are interested in short term investments and want to earn profits. The Forex Market is far more volatile than the stock market, hence currency trading is far more profitable. But with high volatility, the risk is also very high.
Stock Market is your best choice of you are interested in holing your investments for a longer time period. Stock market is a regulated market and with a bit of patience can earn you massive return on your investment.
As an investor, you can earn good return from both these financial markets, The key is to learn the tricks of trades and master the strategy that suits your trading goals.
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