It’s been a long time since trading is not only available to investors with deep pockets.
Lowering the capital requirements and implementing the digital charts and platforms have changed the way retail trading works.
Now the logical question arises “What is easier to trade Forex or Stocks?”.
We can extend the question to Forex vs Stocks vs Indices vs Futures.
However for the sake of the beginner traders we are going to mostly cover stocks and forex as those two are probably the most widespread markets.
You will find a lot of pros and cons to the question above. Truth is there is no right or wrong answer. Whatever works for you, or to put it in simpler words: whatever brings you money, is easier to trade.
If you have found a method that works for both and you extract pips equally good from both markets then trade them both!
In this article though, I would like to dig deeper and cover most of the questions I have received directly from readers and managed to found on the internet.
Go over the material and make an educated decision for yourself. This article aims to be the stepping stone for beginner traders who are still undecided on whether to go with stocks or spot forex.
If by the end of this article you are still puzzled on a given issue, please post your comment in the section dedicated to that and I will get back to you as soon as possible!
4 Key Differences Between Spot Forex And Stock Market
1. Duration of the Trades
In spot forex (or just forex) you will find different styles of trading – from scalping (very short term trading that lasts from a few seconds to a few minutes/hours) to swing trading (a trading style where the investor tends to hold the position for significantly longer periods of time, aiming to ride the market cycles) or Investor Style Trading.
It is however a known fact, that forex attracts traders with its high volatility which no other market can provide (forex daily turnover on an average day is $5.3 trillion). Those are huge numbers and if you know how to take advantage of the situation, you may end up with nice chunk of profits.
A high volatility market along with leverage is a winning formula for the intraday traders who are looking to extract pips on daily basis. As opposed to stock market traders where the majority will be holding their positions for weeks/months maybe even years.
2. Decentralized vs Centralized Markets
The forex market is decentralized (over the counter) which means the big banks, hedge funds, institutions, brokerages etc., are trading directly between each other.
There is no physical location of “the market”. It all happens over the internet/phone. In such market structure the participants may look for ask/bid offers from different providers creating a habitat of competition which means lower fees but unfortunately not always a better quality.
Equities on the other hand are traded in Stock Exchanges such as the London Stock Exchange for example which is centralized. All transactions are routed to one central exchange and the offered quote is the only one available to the participants.
Decentralized vs Centralized Market Structure Explained:
Imagine that you go to Mall X where you want to grab a quick bite. There are 10 fast food boots and all of them are offering burgers. However the cost of the burgers vary at each stand. Some will offer bigger portions for less, others will rely on their brand and stick with a higher price even though the burger is smaller etc. This is the equivalent of the forex market structure.
Now imagine you go to Mall Y where there is only 1 place that offers burgers. No competition, no options. Take it or leave it.
3. Market Hours
Thanks to internet and technology anyone, anywhere in the world is able to trade. This is the beauty of this profession! Back to the subject of forex and stocks. Some might be disappointed from the stock market availability as every exchange has it working hours. If you live in a certain location where the hours don’t fit your preferences you might find yourself stuck in a tough situation.
The forex market on the other hand is open Monday through Friday or 24/5. Five days. twenty-four hours a day. This sounds a lot more tempting as in this case location doesn’t really matter.
It matters to an extend where you want to check what are the active currencies during your hours of operation.
For example it doesn’t make a lot of sense to trade the EURGBP pair in the Asian session when very low volatility could be expected for this specific pair. JPY pairs would be a better fit for instance.
This is where the limitations end when it comes to forex, just choose your trading instruments wisely and you are good to go.
4. Variety of instruments
The more the better they say. Well I’m not sure this is the case when it comes to trading. You can pick from literally thousands of companies traded. If you have ever traded before, you can imagine how much hours of work that would take to scan them all.
I leave alone the fact that scanning them all is actually physically impossible, however even if you had a software which will tell you which ones are moving it would still be very difficult to follow up and decide what to trade.
In forex things are a bit different. Depending on your broker you might find +70 currency pairs in your watch list BUT you will not be trading more than 20/30 pairs maximum.
The so called majors have the narrowest spreads and thus are the most traded pairs – usually.
In reality scalping and intraday trading is almost impossible on exotic pairs and some of the crosses where the spreads are just not worth it.
Forex or Stocks For Beginners?
Besides the key differences mentioned above which you should be taking into consideration already when you are deciding which one is better for your, there is something else that must be mentioned.
The nature of both markets is different.
Well first of all the obvious – when you are trading shares, you are investing in the value of a given company (besides the situations when you are shorting it but this subject is way too long to fit inside these brackets).
When you are trading spot forex you are betting against the economy of country versus the economy of another country.
Company ≠ Country
Maybe there is no need to state the obvious but you can’t really compare a company to a country. There could be a million things happening behind the scenes to which a shareholder has no access.
I’m not saying we know everything that is happening in the backstage of a country’s government – no not at all, I’m just saying that a lot worse could happen in a company, and a lot faster.
Many people might interpret this fact in different ways and it is up to you to decide whether that brings more risk to the table or less risk.
Cost Of Trading Forex or Stocks
This chapter is short and its only goal is to tell you this: trading stocks is usually more expensive than trading Forex.
You can’t really compare the spread on the majors (forex) with stocks. Some brokers are offering spreads as low as 0.1 pip. This is amazing. In stocks on top of the spread you will most likely find yourself paying a commissions as well.
This is something that definitely makes huge difference in the longer term.
That would be all for now. Please share your opinion on the subject, I’m eager to hear what you guys think but please support your view with arguments. And if you have a specific question – you know what to do.