If you are thinking of beginning to trade on the financial markets, then the two major players that most people start with are forex or stocks. For the newcomer to trading though, it may be unclear as to which is the best. Many investors now are choosing the forex market for the many advantages that it has over trading on the stock market.
Forex v stocks – what is the difference?
Before we look at why forex is often the better market to trade on, it is worth clarifying the difference between the two.
The forex market is also known as the foreign exchange market, which gives a clue as to its purpose. Here, traders deal in currency pairs and take out trades based on the price of each currency pair. If you think that the price will rise, then you open a buy (or long) trade, while an expected move down would see a sell (or short) trade opened. The currencies in each pair are in effect doing battle against each other, which is why how each currency is doing compared to the other is so vital. Many forex platforms have now also expanded to let you trade on the price movement of indices and cryptocurrencies among others.
The stock market works in a slightly different way. Here, you would buy shares in a listed company and actually own the shares you have bought. You would naturally do this expecting the price to rise and give you a healthy profit when you sell them. If they go down, then you would either take the loss or wait for them to rise again to at least make your money back. The stock market sees you buying shares in just one company at a time, and it is entirely their fortune that dictates if you win.
Why choose the forex market?
Why should you trade on the forex market rather than the stock market? Here are some very revealing answers:
- Size – to be fair, the stock market is no slouch in terms of size. It is thought that around $40bn is traded each day on the New York Stock Exchange alone, for example! However, this simply cannot compete with the $5tn traded each day on the whole forex market. Why is this such an advantage? A larger market makes it harder for individuals to manipulate it while also making it more liquid.
- Greater liquidity – as noted above, the forex market’s size makes for superb liquidity. Liquidity is the ease with which one asset class is traded for another. More liquidity is good because it allows you to get in and out of your forex trades easily with lower transaction costs for setting them up.
- Open 24 hours a day – one big bonus of forex is that the overall market is open 24 hours a day all week – it only closes at the weekend! The stock markets in relevant countries simply cannot compete here. If you work a normal 9am to 5pm job, then the forex market is the best one to allow you to trade at night after you get home.
- Leverage – when trading on the forex market, you will have access to far greater leverage for your trades. Leverage is in effect borrowing money from your forex broker to make bigger-sized trades. For example, a 10:1 margin could see you make a £10,000 trade with only £1,000 in your forex account. This can naturally lead to a greater profit when it comes off. Just bear in mind that using large leverage on a losing trade can also see bigger losses!
- Not as much capital needed upfront – although there is no actual limit to trade on the stock market, most advice says that you would need more money initially than if you traded on the forex market. This is naturally an advantage for forex as you do not need as much money to get going and don’t have to risk as much either.
- Time frames – when it comes to forex, there is a much wider choice of how you can trade the market and less of an emphasis on holding what you buy for months on end, as you do with stocks. Forex sees many different charts showing different time frames, from daily forex charts to weekly, hourly or 15-minute ones! This gives you great freedom to decide how you like to trade and enjoy it more.
Forex is the clear winner
When you look at the two markets side by side, forex comes out as the clear winner. Not only is it bigger and more liquid, but it also gives greater freedom in how you trade and is generally easier to pick up. Of course, you do need to take the time to fully understand forex before diving in and also keep a check on the forex news each day, but this is all pretty easy and enjoyable.