If you are new to trading, and you are trying to decide what to invest in, you may have run across a typical dilemma that traders often encounter — is it better to go for stocks or the forex market? Which one is more profitable?
These days, when trading and investing are as easy as making a few clicks on your computer, the question of which of these you can go for becomes irrelevant. The new question is which one you should go for, and that is what we are going to explore today.
Forex vs Stock market
In order to better understand which of the two is better, let us first recap what these two markets are all about.
Let's start with the stock market, as people are typically more familiar with it. The stock market, naturally, trades stocks, or shares. Stocks are financial instruments that represent ownership in a company. Apart from that, they also represent a proportionate claim on the assets that the company owns, as well as the earnings that it is making.
Basically, you can split ownership of a company into smaller parts and sell them to a number of people who are willing to pay to become their new owners. They become the company's shareholders, and they own a slice of the firm. The more shares you own, the greater the percentage of ownership of the firm itself.
On the other hand, we have forex, or FX, also called foreign exchange. Forex trading basically revolves around buying and selling foreign currencies in order to make a profit.
If you have ever compared the prices of different currencies, you likely understand the bottom line. That bottom line is — use some of your money to buy foreign currency. When its price goes up, sell it before it comes crashing down. The difference between the price at which you bought the currency, and the one you sold at represents your profit or loss.
The more money you have, the more you can buy, and if you get it right, the more you can earn once the price moves favorably. Of course, you can also lose more if you get it wrong, and the price actually falls instead of growing.
Similarities and differences between forex and stocks trading
Now that we know which is which, it is time to talk about what makes them similar, and what makes them different.
For example, both the forex and the stock markets are fully-developed and regulated markets around the world. They have millions upon millions of active traders and investors, with their numbers growing in the past several years.
Forex became very popular in the past few years, and more and more people are joining up, many of which have chosen this way of earning to make a living.
That is where the similarities end and differences begin. For example, one of the bigger differences lies in the availability of the market. As you may know, the stock market is only available during business hours. Forex trading, on the other hand, is available 24 hours per day. This gives forex traders an edge when it comes to short-term trading.
Another difference is liquidity. Forex has the advantage here, as well, as people always look to buy or sell foreign currencies, whether for use or trading purposes. Of course, markets with high trading volumes are by default more liquid.
However, in the stock market, trading stocks with lower volume is difficult, as you sometimes simply cannot find interested buyers. This makes it harder to sell stocks whenever you want to, which, in turn, can lead to great losses.
There is also a matter of volatility, which can strongly affect your profits, which leads us to our next segment:
The thing about stocks is that they are the best for long-term investments. You find a company that you have high hopes for, purchase its stocks, and forget about them for weeks, months, or even years.
In the meantime, you get paid a bit simply for holding them, but the real money will come as the company develops and becomes more successful. This leads to the growth in the price of its shares, and therefore, when you decide to sell, you get a lot more than what you originally paid for.
If you are more interested in short-term trading, then forex is a much better way to go.
Of course, the stock market does have day-trading, which basically means that you can buy stocks in the morning, and sell them in the afternoon. You bought and sold within the same day, and the price movement for that day determines how much you will earn or lose.
However, stocks are not that volatile, and their price within a single day can move very little, except for situations where the company suddenly got under the spotlight.
One recent example of this was Germany-based Wirecard, which found itself both, under the spotlight as well as under heavy fire due to the fact that as much as $1.9 billion was discovered to be missing from its accounts. The negative publicity, the investigation, and freezing of the firm's accounts led to a massive stock price crash.
However, for the most part, stocks do not often grow and drop that much on a daily basis.
Forex, on the other hand, does. The prices of currencies are always changing, depending on events, reports, geopolitical situations, and more. They go up and down all the time, and as such, they make forex perfect for short-term trading.
Add the fact that forex markets are available 24 hours per day, and you can truly make use of the market changes.
Which is easier to trade?
When it comes to trading, there is no longer such a thing as easier or harder. All trading, from a technical standpoint, is extremely easy these days. As mentioned before, all you need to do is click a couple of times, and your purchase or sale is done.
However, when it comes to how to be a successful trader, both are pretty much equally as hard.
There are no shortcuts here, and you will have to spend some time learning, whether you decide to go for forex or stocks. Simply put, you will need to learn how the market works, and the best way to do so is a combination of theory and practice.
As far as theory goes, you should read reports, predictions, guides, and explanations on how both markets work. You can also follow professionals on social media and get their own two cents about the markets.
When it comes to stocks, you need to research the firm whose shares you are buying, study its roadmap, its reputation, its officials' reputation, its partners — basically everything.
The stock moves up and down based on the public opinion of the company, which means that you must be aware of everything that is happening to the firm, but also know how the people are going to react to the changes. For example, new partnerships are almost always a good sign that could lead to a stock price growth,
A resignation of a popular official, on the other hand, would make shareholders worry about the future of the company, which might cause many to start selling, which would lead to a price drop, as the demand weakens.
This is not the case when it comes to forex. You don't really have a company or a CEO to look into — it is simply a currency of some foreign land, which changes based on supply and demand, the overall state of the economy within the country, and similar aspects.
These need to be studied as well, of course, but the thing is that most of the forex price movements are impossible to predict, and you will simply have to react quickly on the price changes, rather than try to predict which way the price will go.
This is why short-term trades are the best approach to forex, while the stocks can be traded quickly, or invested in for longer periods. As long as the company doesn't fail completely, there is still a chance for its stock to see price growth at a later date.
Forex vs Stock: The cost of trading
Now, to establish which is truly the most profitable — stock trading or forex trading — we must also keep in mind the cost of actual trading. That means keeping in mind various fees, such as trading fees, account maintenance costs, and alike.
When it comes to the average cost of trading stock online, one study concluded that the average fee per trade, if you were to trade on your own, would be around $8.90. Of course, the fees vary from platform to platform, but the lowest one was at around $5, while the highest one sat at almost $20.
When looking into the fees of 15 brokerages, the average fee ended up being just short of $9. But, that is if you trade on your own, as mentioned. If you make use of the brokers' services, your so-called broker-assisted fee is much higher — $30.99 on average.
Naturally, this is only a part of it, a fee that revolves around direct transactions. You still need to pay to have your account there, which, on average, also ends up being at around $32-50.
There are also plenty of other fees, many of which are handled differently, depending on the platform. Some fees are quite high on one platform but eliminated on another. Some fees do not have anything to do with the brokerage, but with the bank you use, such as the wire transfer fee, but they still need to be included, as they take a chunk of your profits away from you.
Meanwhile, when it comes to trading forex, you have all kinds of costs there, as well. Most will vary from broker to broker, and some costs are optional, such as paying to receive the fresh news. However, we are more interested in looking into how much you necessarily have to pay to trade forex.
With that in mind, you have spread rates, which can depend on various things, such as market volatility, and the currency pair itself. This can vary heavily from platform to platform. The minimum spread can sometimes be 0. Average spreads, however, can be at around 0.15 for pairs like EURUSD, or USDJPY. They can go even higher for other pairs, like USDCHF, or GBPUSD, but, as mentioned, it all depends on your broker, trading platform, and alike.
Then, there are commission costs, of course, which can also be either a fixed fee or a relative fee. A fixed fee remains the same regardless of how big your transaction ends up being, while a relative fee grows with higher amounts. So, you may end up paying $1 for $100,000, or $100 if you buy $10,000,000.
Of course, swap rates should also be included in your calculations, which are basically a rollover interest for keeping your position open overnight. Some traders prefer to do so and pay to keep their positions open, while others would rather close them before the end of the day. In the end, the decision is yours, and this is one fee that you can choose not to pay simply by modifying your strategy in a way that will see you open and close a position in a single day.
In the end, forex traders can make huge gains. However, the FX market remains quite volatile, which means that you can also make huge losses. The stock market is less volatile, so your investment will not show immediate returns, which is why they are typically long-term investments.
So, which one is more profitable, stock or forex?
In the end, there is no right answer when it comes to which is better, stock, or forex trading. It depends more on your own trading style and your own preferences.
If you wish to make a quick profit, forex is likely the best way to go. If you have patience and the will to do heavy research, and then make long-term investments, stocks are the best way to go about it. If you want to make short-term stock trades, you can do that as well, but you should not expect major price changes on a daily basis.
The decision is yours, and your preference is all that matters. Once you decide on that, and you do some thorough research, you will be able to move forward and make profits by exploiting the price changes in your asset of choice.
Author: Ali Raza - A journalist, with experience in web journalism and marketing. Ali holds a master's degree in finance and writes extensively about the financial markets and fin-tech industries.