When it comes to investing and trading the financial markets, one of the first questions that comes to mind is what is the best invest in stocks or invest/speculation in the currency markets, what is the difference between trading stocks and forex? Both of these financial instruments are different and come with difference risk levels. There are stock traders who also invest in forex and vice-versa, Trading both instruments without trading plan and fixed strategy can easily make a new investor to potentially lose their invested capital. Stocks and forex for that matter are both risky, to avoid that the investors must know what the meaning of trading and also learn from experts.
Both of these financial instruments are different and come with difference risk levels. There are stock traders who also invest in forex and vice-versa, Trading both instruments without trading plan and fixed strategy can easily make a new investor to potentially lose their invested capital. Stocks and forex for that matter are both risky, to avoid that the investors must know what the meaning of trading and also learn from experts.
Cost of entry.
Trading stocks requires a much bigger capital than what you would need to trade forex market. So, for most average investors or speculators, forex looks like the best solution to enter into the financial markets.
While it might seem easy, forex trading makes use of leverage, which is required in order for small speculators to magnify their controlling units when trading forex. This is both advantageous and disadvantageous for the speculators.
While profits can be large, losses can also be equally large to the point that they could potentially wipe out the invested capital.
When the speculators trades the forex market, he can trade the rising and the falling trend because forex trading means buy one currency and sell the other.
With forex, currency pairs form the instrument. Speculation is done when you expect one currency to rise or fall against the other currency. With stocks, you buy the shares when you think that the share price of the stock will rise.
This behavior leads a large number of traders to prefer the forex market.
Lower spreads on forex.
Spreads, the difference between the bid and ask price are on average smaller compared to stocks. Although some large cap stocks such as Apple have tight spreads, it is not the case with many other stocks that you can trade.
In the forex markets, the major currencies involving the EUR, USD, GBP, JPY, CHF and CAD come with tight spreads due to the volumes that these currency pairs enjoy. Thus in the longer term, the spreads are a lot cheaper compared to trading stocks.
Leverage is basically how far your money can be multiplied. In order to get leverage in the stock market, you will need to request a margin account with your broker. After you get approved, you’ll most likely be given 2 to 1 leverage, which means with a $1000 deposit, you can buy up to $2000 worth of stock.
On the other hand, most Forex brokers will give you 50 to 1 leverage. This means with $1000, you can invest up to $50,000. And no I’m not joking.
The forex market is open 24 hours a day starting on Sunday at 5pm EST through Friday at 5pm. Stocks are bought and sold in stock exchanges, such as the New York Stock Exchange (NYSE).
Most stock exchanges are only open Monday through Friday from 9:30AM to 4PM local time, as in the local time of the state/country the exchange is located in.
From the previous items we can conclude that there are a lot of differences between trading the forex market and the stock market. Furthermore, choosing one of them is depending on what your risk tolerance is.
investor should also understand what his goals are whether he wants to speculate or invest in stocks or in forex.