Trading stocks and currencies are two ways of investing in the financial market. Each method of investing has its own benefits and disadvantages. Here easy-forex gives you some characteristics shared by both financial markets to help traders decide:
Leverage and Margin
The forex market is highly leveraged. Leverage provided for forex trading may be as high as 500:1 in some cases. This enables forex traders to control larger positions than they can do in the stock market. The stock market is also leveraged, but the leverage allowed in the stock market is not as high as that of forex. This means that more money may be needed to open a margin account in the stock market than is required in forex.
1) Direction of Trade
Currency trades may be profited from either buying or selling a currency, making the market bi-directional in terms of profitability. Some stock markets allow profiting from going long and shorting a stock. But in the majority of stock markets, short selling is either severely restricted or banned in its entirety. This places a restriction on how an individual may profit from the stock market.
For instance, a trader from Africa may profit from either going long or shorting a currency pair. But such a trader cannot profit from shorting a stock because short selling is not allowed on most African stock markets.
2) Market Liquidity and Order Fulfilment
The currency market boasts of more liquidity than any other market in the world. This means that it is not hard to place an order in the market and get execution in a matter of milliseconds. However, the stock market does not boast such liquidity. There are still stock markets in the world where execution of trade orders may take days.
Order fulfilment is a direct product of market liquidity. These days, the yearnings of many retail traders is to make money as fast as they can in the financial markets. They may therefore tend to tilt towards markets which POTENTIALLY promise faster returns. This is one of the reasons why the allure of forex is growing and the daily turnover in the market is almost five times what it used to be ten years ago, and by far outstrips the daily turnover of the biggest stock market.
3) Local vs Global
Stocks in any exchange do not have worldwide exposure. The US markets are about the only market where listed companies are traded on platforms which can be accessed across many countries. But this is as good as it gets for stocks. In contrast, currency trading has worldwide reach. This is because unlike stocks, currency trading is not under the control of any national exchange or national government.
4) Short Selling
Unlike in the stock market, investors do not face any restriction in short selling in the Forex market.
5) Trading Information
The Forex market is one of the fairest financial investment markets, as everyone has easy access to all information required to make vital trade decisions at any given time. This is quite unlike the stock market, where analysts and professional traders have access to inside corporate information, providing them a competitive edge. Moreover, finding a good trading opportunity in the stock market might mean scanning data related to thousands of companies. In the Forex market, traders need to focus only on six major currencies.
Which is Better: Forex or Stocks?
The question of which market is better is a subjective one. This is because no two traders are the same. Risk appetite/aversion, profit targets, age of the investor as well as individual trader aspirations are all factors that will determine the answer to this question. So you can place yourself accordingly and decide which of these markets will suit your style and objectives.