Is it better to trade forex or stocks? Investing in Forex Vs Stocks in 2022

Often a novice trader faces a question. You have, say, $2-5K. Where to invest? What market is better? Experienced traders recommend two options: stocks and forex. Both will allow the trader to benefit from trading opportunities. Of course, a trader or investor chooses one option depending on a mass of purely subjective factors: temperament, position in society, income level, and others.

Today, we will find out which market is more convenient for a beginning trader. Let's look at the advantages and disadvantages of trading currency pairs on the Forex market and stocks on the stock market and draw appropriate conclusions.

Forex vs. Stocks: Should You Trade Forex or Stocks?

Emerged in the early 1970s, forex has now become one of the most popular financial markets among private traders and investors. This relatively young market is based not on investing in someone's business, but on trading currencies of different countries, which makes it possible to place a huge number of trades every day. Many investors combine trading on forex with activity on other, more traditional financial markets, however, one should not approach trading on forex and, for example, the stock market in the same way. There are substantial differences between these markets that should be taken into account when developing trading strategies.

The stock market, we are talking primarily about the United States, is very well regulated by the relevant authorities. The purpose of such regulation (in the U.S.) is to ensure the financial security of participants, especially traders, and the standardization of procedures. Investors (players) are protected, the exchange operates smoothly and efficiently, the impact of unfavorable market conditions on the economy is minimized, competition is supported, and unfair practices are prevented - this is the ideal regulation. The fee for this is a multitude of commissions paid by players (investors) and other bidders.

For example, in the U.S. the regulated bodies are the Securities and Exchange Commission (SEC), the Federal Reserve, the Commodity Futures Trading Commission (CFTC), and the National Association of Securities Dealers (NASD).

By definition, the currency market is a system of stable economic and organizational relations connected with the purchase or sale of foreign currencies or payment documents in foreign currencies. Most transactions are in U.S. dollars, euros, British pounds sterling, the Japanese yen, as well as Swiss francs.

On the other hand, the stock market is a system of relations connected with operations of purchase and sale of securities, i.e. stocks, bonds, etc. Through banks, special credit institutions, and the stock exchange, monetary savings of legal and natural persons, as well as the state, are accumulated and channeled to productive and non-productive investments of capital. There is a primary securities market, in which the securities are directly issued, i.e., issued and placed. The secondary market is where the purchase and sale are made.

Forex Market vs. Stock Market

The basic principles of trading work on both the stock and the forex market in the same way. In both cases, the technical or fundamental analysis is carried out similarly (except that on the stock market, the main accent is made on the fundamental analysis), and the purchase or sale of the chosen financial instrument is made. But in fact, these two institutions are quite different from each other, and every self-respecting trader should know these differences.

At the forex market, at least in that form, which is available to a wide range of people, trading is carried out by the so-called currency pairs. A currency pair is nothing more than a simple ratio of the value of one currency of its component to its other component. For example, the pair EUR/USD is the ratio of one euro to one U.S. dollar.

Naturally, when the value of one of the constituent currencies of the pair changes relative to the other, then the pair's rate changes. So, in the case of EUR/USD, the rate will grow as the value of the euro increases and will fall as the value of the U.S. dollar increases.

At the stock market, more tangible (if we can put it that way) assets such as stocks or bonds play the role of financial instruments. That is, in fact, the stock market allows investing funds in existing businesses with the expectation not only of growth of their (business) value but also for dividends or even participation in their management (due to an impressive stake in the company). And the currency market makes it possible to buy one currency for another in the expectation that one of them will rise or fall in price relative to the other. And if the currency market is a field of activity for speculators, the stock market is more the domain of investors.

By the way, at the stock market, one can trade currency futures, and at forex, many dealers offer an opportunity to trade CFD for many popular stocks or precious metals. Therefore, strictly speaking, nowadays the division by the type of traded financial instruments is not so urgent.

The process of trading itself may also differ. The nature of the rise and drop of a currency pair's price is the same. Shares can show sluggish growth for a long time and then fall rapidly. If in forex one can predict volatility increase because sharp price movements are mainly connected with economic news releases, stocks can change their value very fast due to factors that are simply not available.

Forex or Stocks: Comparing Liquidity

Thinking over the question - forex or stock trading, one should keep in mind liquidity. Liquidity is the feature of marketable assets or securities as a whole to be sold as quickly as possible at a price close to the market price. The term liquidity can also be called the fastest possible process of converting market assets into monetary value.

Liquidity in stocks depends on the company. Stocks of very large companies have high liquidity; less popular stocks have lower liquidity. Buying and selling stocks is also strictly regulated. On an account of up to $50,000, you don't have to worry about it. An account over 50K? Here it is worth thinking about. It will not always be possible to enter a position at a better price.

It is well-known that the forex market is liquid. So, if you have a large account and you're thinking, what's better - the forex market or stocks? You should choose the forex market because there is always an opportunity to execute your position there. After all, it is the most liquid market.

This is one of the reasons why most trades made in the forex market are short-term. The high liquidity allows traders to buy currencies, hold them for just a few minutes or hours, and then sell them again.

Currencies are rarely used as long-term investments because they have no intrinsic value.

Why do we care about liquidity?

Generally, liquidity is required for large investment amounts. If the amount of assets is small, you are likely to be able to realize a trade, even in instruments with low liquidity.

It is not enough to determine the liquidity of a day's turnover, so it is always advisable to look at the Depth of the Market. Especially it concerns illiquid instruments. If the required volume at the necessary price is not available in the Depth of Market, it is recommended to use a limit order.

Suppose we have a luxurious, very expensive property, somewhere outside the metropolitan area. To sell it, with its not very convenient location, in terms of social geography, and with its multimillion-dollar interior, it will take a lot of time to find a worthy buyer. After a long time, you, for example, have found someone willing to buy this mega-mansion, but then it's weeks to bid since such big deals are not done in an evening and with one handshake.

Another thing is a middle-class apartment, but already, let's say, downtown. If you decide to sell this property, you will need to submit an advertisement in a local newspaper, on the Internet, or on federal television. The next step is to meet with a buyer and get all the necessary documents from the appropriate authorities. Fortunately, you can use the MFC (Multifunctional Center) for this purpose recently.

From the above example, you understood why luxury goods and services requiring a long-term investment are classified as low-liquid assets. And less expensive, and not requiring long-term costs, both in monetary terms and in time, refers to the middle class of liquidity.

Liquidity assessment is extremely important in a situation where the invested funds may be needed quite quickly in the future, for example for the purchase of the real estate. In such a case, it is important to assess the liquidity of securities in advance, so that when the need for funds arises, you will not have to sell assets at prices that are significantly below-market prices.

Narrow vs. Wide Focus

Perhaps the main difference between forex and stocks is the scale of the trader's focus. When looking at an individual stock, you may focus on a narrow set of variables.

While you are likely to pay attention to broader trends, the factors directly affecting the company in question will be more important, along with the market forces in its sector. Of primary importance will be relatively narrow indicators such as:

• earnings per share (EPS);
• revenue;
• PEG ratio;
• debt-equity ratio;
• company management's guidance;
• analysts' recommendations;
• dividend yield.

In the case of the currency market, the scope is wider.

As you know, the currency reflects the aggregate performance of the whole country's economy. That is why currency traders are more interested in macroeconomics. That is the difference between the technical analysis of forex and stocks. The market and is influenced by some factors:

• inflation;
• interest rates;
• economic growth;
• supply and demand;
• political developments.

They will take precedence over private sector indicators. When you trade any forex asset, you are trading two currencies at once. You are always buying one currency and selling the other currency in the pair. Therefore, a fundamental trader considers the performance of not one, but two economies. Of course, you can focus on technical strategies instead of looking at fundamentals.

Forex vs. Stocks: Trading Times

As you probably know, the operating hours of stock exchanges are strictly limited by the trading session. In case the exchange is on the other side of the globe, the trader will have to work at night. In this connection, the relevant question arises: on which exchange is better to trade because each of them has its list of shares. It is fair to say that the list of traded stocks at each exchange is quite extensive and counts in thousands. Therefore, it is not a trivial task to choose shares for the current work. For intraday trading, you will have to look through all those several thousand charts daily before you start working with them. Speaking about position trading (which is what the stocks were designed for), technical analysis alone is not enough. A lot of factors have to be considered, such as general economic conditions, dividend payments, change of the management of a certain company, and a lot more. This is usually done by professional analysts of investment funds who have access to the financial statements of the companies whose shares are being considered for investment opportunities.

Forex is easier in that respect. You can trade at any time of the day or night, the analysis of price movements requires much less cost and knowledge and looking through dozens of charts is by far the easiest. And given that most traders are limited to less than ten currency pairs for trading, there are usually no difficulties in terms of choosing an instrument to trade.

Margin and Leverage

It is no secret that it is possible to start trading on the forex market with only a hundred US dollars. And you can deposit without leaving your home (with a cell phone, with an e-wallet, with a bank card), so there are more than enough tools to deposit funds.

Such an availability in terms of the entry threshold is largely due to the enormous size of the provided leverage (up to 1000 on Forex, against 1 to 10 on the stock exchange), as well as the simple fact that the transaction may not be taken to the interbank.

Although, at present, the entry threshold to the exchange also cannot be called exorbitant, nevertheless, it is much higher than in the forex. This is because brokers, by law, have no right to provide their clients with leverage higher than 1 to 10. For this reason, to buy securities, you will need to pay their full price.

In addition, for successful trading you need to diversify your investments. That means, for example, that if in practice you have enough capital for one lot of Company A shares and, purely theoretically, you can begin your activities on the stock market by buying them, but it will not make any sense from a capital management point of view. After all, to keep your portfolio as safe as possible from major drawdowns, in addition to shares of company A, it should also include shares of some other companies (depending on the degree of diversification and the level of risk taken).

By the way, such a big difference in the size of the leverage provided also gives rise to a completely different attitude to risk. Operating with sums that are several orders of magnitude higher than the amount of trading capital you can either make a huge returns or lose everything.

At the exchange, no one will give you leverage higher than 1 to 10. And even then, its size is not provided in all cases (the credit may be given when trading, for example, futures contracts or any other marginal trade).

The very possibility to multiply one's deposit by several times (sometimes by several tens of times) in one transaction pushes many people to take exorbitant risks, the natural consequence of which is a loss of all trading capital.

Forex Trading vs. Stocks: Conclusion

It doesn't matter if you choose forex or stock trading - speculative trading will always refer to activities with an increased degree of risk. The foreign exchange market, thanks to its liquidity and increased volatility compared to the stock market, provides greater opportunities for the speed of deposit increment. So, in general, it is easier to earn on forex, but you need to consider the other side of the coin: it is also easier to lose because high leverage both gives a chance to earn some gains quickly and imposes additional requirements for risk accounting.

All in all, the choice between forex or stocks trading largely depends on individual style and preference. For investors who want to develop a long-term "buy and hold" strategy, stocks are the obvious choice. Short-term traders can choose one or the other.

Forex is a more popular option - it is a larger market, has more liquidity, is available at any time of day, and requires less capital to get started.

Keep in mind that personal preference and knowledge should also play a role in decision-making. Indeed, many traders are more comfortable with stocks since they understand this market better. So, the best recommendation is to trade the market you relate to and feel.

About AdroFx

Established in 2018, AdroFx is known for its high technology and its ability to deliver high-quality brokerage services in more than 200 countries around the world. AdroFx makes every effort to keep its customers satisfied and to meet all the trading needs of any trader. With the five types of trading accounts, we have all it takes to fit any traders` needs and styles. The company provides access to 115+ trading instruments, including currencies, metals, stocks, and cryptocurrencies, which make it possible to make the most out of trading on the financial markets. Considering all the above, AdroFx is the perfect variant for anyone who doesn't settle for less than the best.