19 October 2023
The main similarity of Forex and stocks is that they are both financial markets. The term itself, Forex vs stocks is a very subjective one and can always change based on who is debating the issue.
However, the differences are very clear. Forex is the act of trading currencies, while stocks are the act of buying and selling the shares of various companies. Both of them are used as a way to generate payouts by the traders and a way to fund future projects by various companies.
Other similarities include things such as tools, terminologies, responsiveness to news and ways to participate in the market.
Both Forex and stocks have become a digital platform and are mainly used by traders speculating from home or from a dedicated office.
As for the differences, there’s always the issue with how much is being traded on Forex compared to stock market. According to data, Forex has a volume of around $7 trillion, while stocks are a bit behind because they are not one single market.
You see, Forex is usually traded via brokers and banks, and stocks are traded on exchanges where the companies register and sell their shares.
Forex vs stock trading - what should traders know?
In order to compare Forex and stock trading, we need to look at both the fundamental and technical aspects of these two markets. In fact, there’s a very easy way to describe it in one sentence.
“Forex and stocks technically similar, but fundamentally different”
What this means is that the way people trade these assets, or the way they make strategies is usually very similar, but the assets themselves are very different. This is especially the case when it comes to talking about centralization.
Centralization is a measure which can tell us how much of one thing is located in one place. When it comes to Forex, we can easily say that it’s not very centralized. Every country has a national bank that has a lot of reserves of its currency as well as foreign currency. Because of this, the Forex market is much more diverse.
Usually, the Forex vs stock market centralization discussion ends there, but we need to explain stock market centralization as well.
Stocks are the shares of companies. These companies have a specific country where they are registered. Because of this, they can only register on local stock exchanges officially, but also have their stocks sold abroad.
Therefore, we get a very big difference. Stock exchanges in the United States are bigger than stock exchanges in…let’s say India. The same can be said about stock exchanges in China, the United Kingdom, etc.
Every stock exchange can be ranked based on how many large companies stocks it sells. This makes it a lot more centralized, simply because the current largest companies in the world are located in the USA.
Centralization is one of the reasons why Forex is better than stocks, but most traders usually don’t pay too much attention to this detail and don’t consider it a big advantage.
Next, let’s try and list some advantages and disadvantages of both of these markets.
Advantages & Disadvantages of Forex
Advantages:
- Not too centralized
- Trader familiarity
- Better liquidity
- Easier to access for beginners
- A chance for larger payouts
Disadvantages:
- Hard to understand
- Too many things to consider
- Very responsive to politics
- Limited options
These are the basic advantages and disadvantages beginners as well as experts usually consider when comparing Forex to stocks, but it’s definitely not a complete list. Additional points can be added, but they mostly appear when already on a higher level of trading knowledge, so these should do.
Now let’s try and explain all of these points.
Not too centralized - this means that there are a lot more people taking part in the market. For example, if you place an order to buy USD with EUR, you’re not necessarily restricted to buying only from the people near you. The order can be filled by somebody halfway across the world from you. This keeps the market very fast and efficient.
Trader familiarity - this means that most traders are already familiar with their currency of choice, and more or less know what affects its exchange rate. Because of this, they usually create a better strategy and respond faster whenever there’s a shift in the market.
Better liquidity - liquidity means how fast something can be sold. For example, imagine that you’re trying to sell a phone and a house. In this case, the phone would have more liquidity, simply because there are more people who are ready to buy it.
Why? Because there are not as many people out there who can afford a house, compared to those who can afford a phone. The more buyers there are, the more liquidity an asset has.
In this case, when we talk about Forex or stocks, we need to consider how many people prefer to “buy cash”, and how many want to buy shares. Because of this, Forex usually has more liquidity and is easier to process orders.
Easier to access - what this means is that it’s easier to start as a beginner. You see, when people start trading, they usually find providers (brokers). These providers usually ask for a deposit so that they can open an account for the trader. Forex brokers tend to ask for much less as a minimum deposit compared to stockbrokers, which is why starting Forex trading is usually easier.
A chance for larger payouts - this means that with Forex, traders usually have the opportunity to generate more with less. This is due to a tool called leverage. Although stock trading also has leverage, Forex usually has more of it.
Basically how it works is that a trader places a trade, and the provider (broker) multiplies it. So, if the leverage is 1:10, this means that the size of your trade will be increased by 10 times by the provider.
This gives traders the opportunity to generate more payouts with smaller deposits and is a very important difference between Forex and stock trading.
Advantages & disadvantages of stocks
Advantages:
- Variety
- Familiarity
- Volatility
- Long-term investments
Disadvantages:
- High entry barrier
- Riskier
- Time-consuming
These are the basic advantages and disadvantages of the stock market, but much like Forex, they need to be explained in detail as well.
Variety - what this means is that there are a lot more options with stocks than there are with currencies. With currency pairs, we get the option of those that exist, right? Well, how many countries are there that have their own currency? 180 to be exact. What this means is that you can diversify the currencies you pair up together, but can’t really expect new ones to come out.
With stocks, there’s a different story. There are thousands of companies that are registered on exchanges and can be traded. There are thousands more that will soon be registered on exchanges as well. This is why the Forex vs stocks argument is simply not debatable when it comes to variety.
Familiarity - similar to Forex, stocks are also very familiar with traders. Imagine a company whose products or services you use on a daily basis. You probably already know how they make their income and how they manage to remain in business. This gives you as a trader the advantage of relative knowledge.
Because of this, you are more likely to understand what some even can change in the company. This usually helps traders to make the correct trading choices in the long run.
Volatility - volatility is something to measure how often the price of an asset changes. For example, if it changes every single day by a significant amount (10-100+%) it’s considered highly volatile. But if it tends to remain on the same price or increase/decrease at a very slow pace, it’s considered low volatility.
Stocks have much higher volatility than currencies, which is why traders usually get better payouts from trading them.
Long-time investments - stocks are usually bought as long-term investments. What this means is that traders buy stocks of companies and hold onto them for months, years or even decades.
Although stocks can change their price much more often, holding onto them for a long time usually results in a better payout. But there have been exceptions such as during the 2008 market crash when all of the stocks decreased in value very rapidly.
Which is better Forex or stock market? - key takeaways
Both of these financial markets have their advantages and disadvantages, but that doesn’t mean that it’s hard to choose.
Most beginners usually boil their choices down to the options below:
Stocks:
- Easier to predict
- Better chance at an increasing payout
- Chance of influencing the market
Forex:
- Easier to start
- More stable
- Faster strategies
However, these preferences are usually very subjective. They don’t mean that if you find one financial market easy to use or familiar, the other one won’t meet the same requirements as well.
The most common strategy is to try both markets out first and then make a definitive decision.
FAQ on FX vs stocks
Why trade Forex instead of stocks?
On terms of the trading difference between Forex and stocks, Forex has clear advantages. One of them is leverage. Although stocks also have it, traders will usually be given around 1:5 leverage with stocks, while Forex traders can have somewhere around 1:1000 on some platforms.
This gives them the opportunity to deposit very little funds on their provider platform and trade as if they had 1000 as many resources available.
But, this doesn’t mean leverage is a very easy tool. It’s very risky and could do the opposite of generating more payouts, therefore, when comparingstock trading vs Forex trading, you should take this fact into consideration.
Which one is riskier - Forex trading vs stock trading?
The dichotomy between the Forex stock riskiness depends on the actual asset. Usually, the risk is calculated based on the volatility of an asset. Considering that stocks have higher volatility, more traders would agree that stocks are riskier. However, it all depends on the strategies and the mentality you use when entering either of these markets.
If you go in with no knowledge, experience, or tools, it’s very likely that you will lose much more than you win.
Therefore, don’t think that just because one asset is riskier than the other, you’ll be safe with the less risky one. No matter how we look at it, financial markets are a very hard thing to navigate, regardless of whether you're trading Forex vs stocks, and usually result in a loss rather than a win.
Why are stocks more familiar than Forex?
Knowledge is something which is the difference between Forex and stock market and could lead to different results.
Generally, the familiarity of shares vs Forex is a myth, although it technically can be justified. We all know what currencies are, right? Especially the ones we use on a daily basis. But we don’t necessarily know all the details of what affects their exchange rate. It could be the economy, or it could be politics.
With stocks, it’s much simpler to understand. Did the company you’re investing in grow last year? Well, that means that this year they are going to try extra hard to beat last year’s results. This usually gives traders an idea that the company is going to grow even more and they tend to buy at this point.
But let’s try a different perspective. Let’s imagine that you really like Japanese cars and invest in a company like Toyota. You know exactly how people react to new models because you are one of their customers.
But, you soon find out that several countries will be banning cars that have steering wheels on the right side. This means that fewer countries will import Toyota cars, so fewer of them will be sold. This usually means that the stock price is going to drop for Toyota, because traders think they will have fewer sales in the future, thus avoiding losses early on.
Why do stock brokers require larger minimum deposits?
The difference between Forex and stock brokers is that they perceive their customers differently. For example, a Forex broker sees its customers as traders, while a stock broker sees them as investors.
When comparing the brokers from Forex vs stocks trading, the former usually knows that its customers will have a lot of trades within the day, so they’re okay with allowing smaller deposits because commission fees are much more frequent.
As for stock brokers, they know that their customers will make a trade maybe once a month, therefore they have to request larger deposits so that their commission fees are a bit bigger.
I’ve been trading Forex for a while now, will it be hard to switch to stocks?
Technically, it’s not hard. However, you will have to adjust to the new volatility. The prices in the stock market vs Forexchange much more often. Because of this, most traders tend to have a long-term strategy rather than a short-term one.
Plus, rearranging the sources you get your information from could also be a requirement. Because websites or experts that talk about currencies, don’t necessarily dedicate that much time to industries and the economy.
It will also be hard to let go of the advantages of FX trading over stocks too quickly. Most traders still apply their Forex strategies to stock trading and end up losing a bit in the beginning. This is natural, traders get adjusted to their new patterns as they go.
Should I only trade local assets?
It’s definitely not a requirement, but people who trade only local assets exclusively, tend to be a bit more successful than those who trade internationally.
The reasons behind it are that local politics usually have a lot to do with stock prices as well as currency exchange rates. If a trader understands the complex political situation of a country, he or she is much more likely to predict future policies or what those policies could cause.
It’s not recommended to trade local assets exclusively though, as every expert trader tends to diversify their portfolio.
But when it comes to stocks vs Forex, both markets have the option to keep you on only local assets exclusively.
Which one will teach me the most about financial markets - stock or Forex trading?
Both Forex and stocks have quite a lot to offer in terms of market knowledge, but they also can teach about politics, economics, finances, and general issues that can be found in the world.
For example, when trading Forex, most people tend to look for political news rather than news from separate companies. For example, Brexit. Every trader was very conservative about making risky trades while Brexit was still being debated, but now that it’s pretty much-guaranteed traders are a lot more open to risk.
By trading Forex, it’s very likely that you as a trader will find out quite a lot about politics.
As for stocks, traders tend to seek information about the particular industry they invest in. This helps them learn about economics as well as politics. It sometimes teaches traders how or how not to run companies based on the stock price changes.
All in all Forex vs stock trading in terms of education is pretty tied as they both provide very important knowledge.
