The key differences between trading Forex and Stocks are that Forex tends to possess higher liquidity, volatility, better leverage options and longer trading sessions as compared to stocks.
Whether forex or stock is suitable for you depends on your trading preference and risk appetite. For traders who are looking for day trading, swing trading, or scalping will find Forex suitable.
Whereas, if you are looking to buy and hold, then you might find stocks more attractive.
Each has its own pros and cons, below we will discuss 4 key factors to help you decide which one is better for you.
# 1 Liquidity
Liquidity refers to the ability for getting securities bought or sold quickly without affecting its price. It is one of the most significant factors to consider while deciding which market you should trade.
Forex
The forex market is known to have the highest liquidity as compared to any other markets in the world. As an estimate, the forex market undergoes a daily trading volume of more than 6.6 trillion U.S. Dollars.
Not to mention, the liquidity level doesn’t stay the same round the clock. Since the Forex market runs in multiple trading sessions opening and closing at different timing across the world. The best time to trade forex is when two market sessions overlap.
During the overlap period, the forex market is likely to have an increased number of traders available. Hence, it becomes a lot easier for traders to fill up their positions.
Stock
The trading volume of the stock market is far less than the forex market. However, selling and buying shares is relatively more simple.
Shares of big giants, such as Microsoft, Apple, Samsung, Facebook can be sold off quickly since more traders are ready to buy them.
However, as soon as you start moving from blue chips to penny stocks, its liquidity becomes tighter and leads to expensive spread cost.
# 2 Volatility
Volatility deals with the level of fluctuations in the prices of tradable assets. Prices change more frequently in a low volatile market as compared to the high volatile market.
Forex
Once again, the volatility level in the forex market is substantial. It is the increased liquidity that makes the forex market less volatile as compared to stocks. Moreover, the numbers of tradable financial instruments (currency pairs, other assets) in the forex market are fewer.
However, it is imperative to keep an eye on the economic calendar while trading currencies because the forex market is more prone to significant price movements as a result of major economic releases.
Stock
On the other hand, prices in the stock market tend to be more volatile. The stock market can become even more volatile when a political event arises.
For example, in March 2018, the price of Dow Jones fell abruptly after U.S. Companies were impacted amid Trump’s escalated trade tension between the U.S. and China.
Not to mention, volatility can sometimes offer increased potential for traders to make profits. However, it also carries significant risk exposure as the market can go the other way.
# 3 Leverage
Leverage enables traders to open bigger positions with limited capital investment.
While leverage increases the potential to make more profits, it also magnifies the risk of losses. Therefore, it is important to consider the size of your position and the risk associated with it before availing the leverage.
Forex
Forex traders can use leveraged products such as CFDs on margin across a wide range of financial markets. Usually, regulated brokers offer clients leverage of up to 1:30.
In some jurisdictions, brokers may even offer higher leverage of up to 1:500 or even 1:1000
Stock
Leverage available to trade stocks is relatively low as compared to forex trading. In the United States, traders may be allowed to use leverage of 1:2 for stock trading.
# 4 Trading Hours
Considering trading hours is also essential to decide your preferred market for trading.
Forex
The forex market runs in four trading sessions including Sydney, Tokyo, London, and New York. Starting from the Sydney session on Sunday at 5:00 pm EST, it closes in New York around 5:00 pm EST on Friday. [1]
Since the forex market remains open 24/5, it offers great flexibility to investors to trade in Europe, Asian or U.S. markets at their convenience.
Stock
Unlike the forex market, stock traders need to trade between limited exchange hours. Usually, Traders can trade between 9:30 am to 4:00 pm (EST) from Monday to Friday.
Stock trading also remains unavailable on weekends.
Final Words
Both forex and stock markets can yield good returns if traded with due care. The above factors can help you decide which market best suits your preferences.
