Forex vs. Stocks Trading, Is There a Clear Winner?

Oct 14, 2021 02:20 PM ET
Forex vs. Stocks Trading, Is There a Clear Winner?

Forex or stocks, what’s your fancy? These markets are some of the most speculated financial instruments in the world, with legions of ‘curious fans’ and serious investors following them.

Due to the popularity shared between the two, people continue to make comparisons over which is objectively better despite being vastly distinct. Stocks have existed for centuries and have an image of being safer than the relatively new and crazier forex market, which has only existed for a few decades.

Ultimately, there isn’t necessarily a clear winner, and both markets can prove equally profitable purely depending on your trading style. Nonetheless, you may want to learn the notable differences based on several key factors if you prefer sticking to purely one option.

Let’s first define what forex and stocks are

As we know, forex refers to the exchange of foreign money. We trade this market through distributed liquidity providers or market makers, providing 24/5 access for traders or customers to speculate, convert different currencies, and hedge against exchange rate risk.

On the other hand, a stock represents an ownership share in an exchange-listed company. Companies list on exchanges and use the stock investments primarily for operating capital purposes to amplify their bottom line.

Although the distinctions between currencies and equities are plentiful, they are ultimately both tradeable as CFDs (contracts for difference), meaning you don’t need to own the underlying asset physically.

Traders primarily profit from the natural price appreciation on both markets, and sometimes dividends (for stocks) and swaps (for forex). Also, you can scalp, day-trade, swing-trade, or position-trade. However, certain inherent factors in both make each style less conducive, which we’ll explore more in the next section.

The main distinctions between forex and stock trading

The table below details the main distinctions between the two instruments at a glance. 

Aspect

Forex

Stocks 

Leverage

Greater leverage = lower capital requirement

Much lower leverage = higher capital requirement

Liquidity

At least $6 trillion traded daily

At least $200 billion traded daily

Volatility

Less volatile

More volatile

Fees

Spreads and swaps; sometimes commission instead of spreads

Spreads and commissions

Technical and fundamental knowledge

Equally challenging, fundamentals focus more on macroeconomics

Equally challenging, fundamentals focus more on economics and company data

Market hours

24/5

Limited daily hours

Number of markets

Up to 200

Thousands

General market behavior

Forex tends to range more than it trends 

Multi-month and multi-year extended trends are quite common in stocks.

Regulation

Less regulated

More regulated

Why trade forex (and why you shouldn’t)?

When comparing the two, currencies trump equities when it comes to accessibility as forex offers higher leverage (meaning less capital required), greater liquidity, more expansive volatility, and longer opening hours than shares. 

Moreover, there are no more than 200 traded pairs (most stick to about 30 or less), making it easier to specialize. These are some reasons why forex has a much larger trading volume than other financial instruments and tends to favor short-term traders. 

Of course, some of these factors are the downfall for many investors. For instance, the substantial leverage can turn into a double-edged sword, meaning you can realize large losses quicker. 

Also, forex is more of a semi-regulated industry as trading doesn’t occur on a centralized exchange as with shares, but rather through decentralized market makers. Hence, it is more susceptible to unregulated and scammy brokers who partake in financial malpractice. 

Nonetheless, it’s seldom to find traders holding their positions for years, but this is common with stocks. Equities have maintained their heritage as long-term investments forming part of a so-called diversified portfolio. 

Although you have the luxury of also holding positions for months or years in forex, markets don’t typically move in one direction for an extended period. While you have the incentive of earning off interest in some instances if the swaps are positive, it’s still less common for traditional reasons.

Investors consider currencies more as a utility, and stocks have naturally always been regarded as investments held for years. So, overall, forex is excellent if you’re looking for short-term trading and not suitable if you’re looking to buy and hold.

Why trade stocks (and why you shouldn’t)?

If you prefer being an archetypal, Buffet-like investor with a genuine interest in companies, then equities are better for this objective than currencies. 

Aside from the long-held heritage of stocks, established companies are constantly being listed on exchanges. So, in effect, you can buy a stock practically from ‘zero’ and hold it for long periods. 

Some established stocks also provide dividends. Whereas in forex, we don’t have new currencies or dividends, and markets tend to stay in a particular range for years. However, since you can also trade equities, scalpers and day traders are prevalent within this market. 

Hence, traders can also hold their positions for seconds, hours, days, or weeks. Nonetheless, another advantage is the stock world is a lot more regulated than currencies, meaning the chances of being scammed are less. 

Sadly, stocks objectively present considerable downsides compared to their counterpart; much lower margin (the presence of leverage is still a financial risk) and limited opening hours. 

Furthermore, it’s a little harder to specialize initially since the basket of stocks is more diverse with the number of exchanges existing from different countries and the types of available equities.

Final word

So, is there a clear winner? At the end of the day, forex and stocks are both CFDs, and traders can replicate many of the techniques used to gain an edge in the markets with both. Yet, this is perhaps where the similarities end since currencies and equities are two different beasts.

If you’re looking for substantial leverage, sufficient volatility to generate bigger profits, and more accessible trading hours, forex may be for you. On the flip side, if you’re more of a conservative long-term investor with a natural intrigue for equities, searching for lower leverage and stock trading might be preferable. 

Luckily, you can still trade both. To paraphrase the Chinese proverb, perhaps good things come in pairs.

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