Nov 28 2023
Guide
Long and Short in Forex - How does it work?
Learn the differences between going Long or short in forex and how you can use these tools to your advantage as a trader.
Forex Vs. Stocks - Which One is For You?
By Glen Carey , Updated on: Apr 07 2023.
Risk tolerance and trading styles will likely determine whether forex or stock trading is the best option for you: short-term traders generally gravitate to forex markets while long-term traders move into stocks.
Forex is more liquid, open 24 hours a day and riskier; stocks are generally less volatile, less risky and held for a longer period of time. With that said, both are speculative trading in high-risk, high-reward markets based on fundamentals and technicals.
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What is the difference between forex and stocks?
Forex allows traders to buy and sell currency pairs, such as the EUR/USD, EUR/GBP and USD/JPY, around the clock, 24/7, and across multiple time zones, while traders buy and sell stocks in a defined period of time.
The fast-paced nature of the forex market makes it appealing for day traders, who like the liquidity and excitement of currencies and are looking for a quick profit.
Stocks offer seemingly endless opportunities to trade thousands of shares across different countries and sectors from mining, energy, technology, automobile industries to pharmaceuticals, beer and marijuana. For example, there are more than 6,000 stocks listed on the New York Stock Exchange and NASDAQ.
There are also new entrants to the market with initial public offerings, which is something the forex market will not have since currencies are managed by central banks globally, not companies.
Featured Brokers for Beginners
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Is Forex Better Than Stocks?
Well, that has a lot to do with whether you are risk tolerant or risk averse – what type of trader you are?
Do you want to buy and sell the EUR/USD or other currency pairs or do you prefer to buy and sell stakes in blue chip stocks, like Amazon –which recorded a $190 billion increase in market capitalization in a single day (Yes, $190 billion!) – or participate in direct offerings?
The general consensus is that short-term traders with a higher appetite for risk and less money gravitate to forex trading, where they can enter and exit a trade at a desired price level quickly given the availability of market participants.
Those looking for more stability over a longer period of time would probably consider equities a better option.
With stocks, traders buy a fraction of a company, basically taking a tiny stake that they can hold for years earning passive income through dividends or benefiting from stock splits.
Is the Forex Market Bigger Than the Stock Market?
Yes, it is – much bigger!
The forex market is the largest and most liquid financial market in the world, with hundreds of major, minor and exotic currency pairs to choose from, making them attractive to day traders, scalp traders and swing traders looking for quick wins.
Stocks, though, offer a much larger number of trading opportunities, from penny stocks to the biggest companies in the world, such as Apple Inc. which has a market capitalization of $2.8 trillion.
But stocks come with lower liquidity and may be slower to turn into a profit.
In the global car market, forex would be a fast-paced Ferrari, accelerating down the street quickly, while stocks are more like Mercedes – steadily but quickly and generally moving in the same direction but without the high volume.
What Has More Risk – Forex or Stocks?
Both can be risky but one is more than the other. It is the forex market!
Forex can be:
- Extremely volatile and difficult to predict given the ease by which currency pairs are traded globally
- A wider variety of fundamental factors affect the value of currencies
- High liquidity can cause prices to swing quite extremely, particularly if you are investing in exotic pairs.
- Economic and political news may have a much greater impact on forex prices
- Forex markets can change on the dime,which has an upside – it is easier to get into and out your position.
That doesn’t mean that stock trading is without risk – many have lost and found fortunes in short periods of time.
In 2020, the global stock market crashed between 20 February and April 7 as the Covid 19-lockdowns hit economies globally. A lot of people panicked and sold, losing a lot of money.
Stocks, though, generally demonstrate:
- More stable price patterns over time, which makes them easier to track.
- Traders can follow earnings reports, investment plans, research and development
- It is easier to determine the risk or benefits associated with their stock.
Is Forex or Equities Better for Beginners?
On this question, oddly forex trading may be a better place to start purely based on the cost of conducting your first trade.
- Forex can be inexpensive compared to stocks.
- Brokers require less money to open an account to trade.
- Some offer standard, micro and even cent accounts with initial deposits from $1.
- Most Forex brokers charge no commission, making their margin on the spread, which is the difference between the buy and sell prices.
Brokers on the other hand:
- Often charge a spread and a commission for stock trading.
- Have generally higher spreads than forex.
Conclusion
As you set out to trade in either the forex market or stocks, give careful consideration to:
- Level of risk you’re willing to tolerate
- Your available capital and your possibilities to open your first trades
- Diversity of assets
If you are risk tolerant, a short-term trader or have less money to get started, then forex trading may be for you. If you want to buy, hold and stick it out for the long term, stocks are probably a better fit.
Good Luck!
Frequently Asked Questions
What Are the Similarities between Forex and Stocks?
By now, we have spent a lot of time explaining the differences between the two. Broadly speaking, the main similarities are that they both are financial markets, they trade on fundamentals and technical analysis and brokers offer both.
Is Forex or Stocks More Profitable?
Given that the forex market is more volatile than stocks, it can be more profitable. Forex offers short-term traders more opportunities to make a quick profit and move on to the next investment. Long-term, with some patience, trading stocks can be a more profitable way to go.
Forex and Stock Trading Hours?
The forex market is open 24 hours/day, 5 days/week, because of overlapping time zones whereas in equities there is a set daily timetable for equity trading hours depending on the specific country and exchange.
Is the Forex Market Bigger than the Stock Market?
The forex market has about $6.6 trillion in average traded value each day, making it the largest financial market in the world. However, there are a greater variety of assets to trade in the global stock market. Brokers may offer dozens of currency pairs, but there are thousands of stocks.
What is the difference between Forex and Crypto?
Forex and stock trading is more regulated than crypto currencies, which have no central authority and are highly volatile and susceptible to extreme price swings.
All three rely on the law of supply and demand, though fiat currencies and stocks have measurable values, while crypto currencies are purely speculative up to this point. Fiat currencies and stocks also have a wider array of market participants, including individuals, governments, institutions, than crypto currencies.
