When someone decides to start trading on the financial market, he or she has to decide where to trade, i.e. which market to choose. Most people trade choose Forex trading or stock trading. These markets are just different and one cannot answer right away what is easier to trade Forex or stocks
or which one is better. That is why today we will compare these two markets and will try to find out which one is more reliable and more successful.
When you trade stocks, you buy and sell shares of individual companies. These shares represent an interest in the company. Each company lists its shares on the stock exchange and then investors buy and sell the shares using brokerage companies as a go-between.
The companies somehow develop, get contacts from the government or they increase their capitalization. For this reason, the value of the company goes up or down. That's how your income changes.
Also, there is such a thing as dividends. Dividends are the share of business profits with which they are shared with shareholders. Dividends are a company right, but not an obligation. Dividends can be different (big and small). Thus, a trader can earn on dividends, besides speculation. This is a brilliant advantage of trading stocks. A trader who is still trying to choose Forex or stocks should remember that there are no dividends on Forex.
Thinking about the question "Forex or stocks?" one should take into account the liquidity of these markets. Shortly, liquidity is how easy you can get into and out of a position. Liquidity in stocks depends on the company. Shares in very large companies have high liquidity, less popular shares - lower, it`s easy to understand.
In the stock market, there is such a definition of "fair value". Let`s say there is a LokMot company and its share should cost 10 dollars. This amount would take into account everything: the company's costs, reporting, investor expectations, etc. The company may cost significantly above or below this value. The company may be worth 6 dollars. Whereas its fair value is 10 dollars. Many investors use a value approach and look for undervalued companies. They buy these stocks with the expectation that they will grow to fair value.
But, unfortunately, not everyone is suitable for investment trading. Just recently people have started trying to make money on the daily market fluctuations, opening and closing trades within a day. They seek to profit from short-term price movements and are not associated with the long-term value of the stock in question. Investors, on the contrary, consider a long-term perspective.
The foreign exchange market, or Forex, is the biggest financial market in the world by trading volume. Only the daily market turnover is a few trillion. Currencies are traded in pairs, with the four major currencies being EUR/USD, USD/JPY, GBP/USD and USD/CHF.
The Forex market is extremely liquid.
If you have a big account and you think which is better - the Forex market or stocks, you should choose the first one as it is always possible to execute your trade as it is the most liquid market.
This is one of the reasons why most trades made in the Forex market are short-term. High liquidity allows traders to buy currency, hold it for just a few minutes or hours, and then sell it again.
Currencies are rarely used as long-term investments because they don`t have intrinsic value.
Choose the stock market - for investments. Choose the Forex market - for speculation.
Your long-term investment goals are easier to achieve with the stock market. As the market is smoother and more connected to specific and understandable phenomena (e.g. reports).
Stocks trading hours
Stocks are listed and traded on exchanges such as the New York Stock Exchange (NYSE), Nasdaq and the London Stock Exchange. The first and most significant disadvantage of the stock market is its operating time. The stock market is not open 24 hours a day.
Trading time is limited. Therefore, a trader can buy and sell only when the market is open.
Forex trading hours
Unlike stocks trading, Forex trading is available 24 hours a day, 5 days a week (or 5 and a half if differences time are taken into account). So, if we go back to our question - which is better, Forex is leading again, now in terms of timing.
Moreover, operating 24 hours a day makes Forex the best choice for part-time traders who may not be able to trade on major stock markets during the day.
Commissions on stocks
As a broker's commission on Forex - spread is more frequent, in the stock market, you need to surmise that commissions can be different.
Commissions may differ from broker to broker and depend on the amount of the deposit. The larger the deposit, the lower the commission. When opening SELL and BUY positions, your profit decreases (or losses increase) due to commissions charged by your broker. This is a small price for long-term investors, but it can have a large impact on traders who execute many positions using intraday strategies.
Besides, the broker charges an increased commission for margin positions (short).
A few moments ago, we talked about commissions on stocks. Now choosing among stocks or Forex, you should also consider that there are commissions on the Forex market too, but it`s just called differently.
The Forex brokers make their money through the difference between the Bid price (what you get for selling) and the Ask price (what you pay when buying).
On some types of accounts, apart from the spread (bid-ask), you pay additional commissions. On the other hand, the lack of commissions leads to a wider spread and this must be taken into account when assessing your potential profitability. Anyway, commissions on the Forex market are less than on the stock market.
On the stock market, the leverage is usually 1:25 which means that you will need more funds to trade, or trade with small volumes.
While in the Forex market - your standard leverage is 1:100 and can be up to 500. This means that you need 100 (500) times less money to place your positions. Thus, the Forex market allows you to earn not only on a big account due to high liquidity, but it also helps you to profit from a small account thanks to the leverage.
High leverage and the ability to buy/sell without restrictions and fees - this is an undoubtful advantage of the Forex market.
The choice between Forex or stocks depends largely on your methods and personal preferences.
In such a way, for investors who want to develop a long-term buying and holding strategy, stocks are an obvious choice. Short term traders, on the other hand, should go for Forex trading since intraday strategies are not working with stocks because of broker`s commissions.
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. Many traders feel more comfortable with stocks since they are more understandable and predictable.
Now after we`ve discussed the main pros and cons of both markets, pause for a moment and think of your financial goals and decide what is your main objective - Investment or speculation? The choice should be obvious by this moment.
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