Forex vs Stocks: Why Forex Trading is More Profitable?
Last Updated: July 22, 2020
Traders in the year 2020 have access to a plethora of trading instruments on the financial markets which gives them more opportunities to trade.
But what is an instrument? They are just a means to an end. Just know that if you want to make an income on the financial market then you need to own a financial instrument.
In essence, financial instruments can be considered the financial contracts between two parties, and these instruments come in various shapes and sizes.
Some common examples of financial instruments are stocks, bonds, and currencies which are also called forex instruments.
What instrument a trader chooses for his main trading activities depends entirely on their trading styles, capital size, expectancy, perspective, etc.
People who are more inept at holding their positions long term usually gravitate towards the stock market while the traders who like to keep things short term and snappy usually tend to participate in forex trading.
However, beginners who are completely new to the entire process of trading might have trouble deciding which market is the best for them: the stock market or the foreign exchange market.
The question of forex vs stocks will always arise from time to time in a trader’s career.
Let us look at the characteristics of both these forms of trading and draw comparisons to determine which one suits your trading style the best.
Let’s start with the stock market first.
The Stock Market
The stock market is nothing more than a collection of markets where traders buy or sell shares that are issued by various public companies.
The stock market is a well-designed marketplace where traders can participate in various trading activities in a safe and controlled environment managed by a handful of financial authorities.
These public companies that we mentioned earlier issue their shares on the stock market for the general public to buy which helps them get investors and raise significant amounts of money for their working capital.
Such undertakings taking place on the stock market are required to fulfill the conditions of price transparency and liquidity as well as fair dealings among the issuers and buyers.
The stock market also allows these public companies the luxury of delisting or buying back their shares should such a circumstance ever arise at any time during the course of their operation.
The price of these companies’ stock is primarily affected by the availability (supply) and the demands of the market and there are various tools and indicators available for calculating these factors.
Now that you are familiar with the stock market, let us take a look at the foreign exchange market.
The Foreign Exchange
This marketplace has nothing to do with the financial instruments of the stock market such as shares or debentures as the fx market only deals with the financial instrument known as currency.
This market is entirely decentralized where central banks, investment banks, financial institutions, large corporations, hedge funds as well as independent fx traders take part in various activities related to currency trading.
The forex market is considered to be highly liquid where trades worth trillions take place each day due to the huge number of participants actively involved in it.
Furthermore, this market is open every hour of the day 5 days a week and it does not have a central location. Therefore it can be said that the fx market never sleeps as there will always be an active trader at some part of the world participating in it.
Forex Vs Stocks
Now that you are familiar with both these marketplaces, let us do a comparison to see which one fits your trading style the best.
Style Of Trading: As we mentioned earlier, the forex market often attracts short term trader although it is entirely possible to trade long term on it too.
When it comes to stock trading, there isn’t much scope for day traders which is why it attracts people who feel more comfortable in position trading tactics.
Tools Available: Both the stock as well as the fx market allows the usage of tools and indicators to aid the traders in their analysis of the market as well as take better decisions on the fly,
Forex traders are known to make use of H1 charts and use m30 for trading while stock traders are known to use daily charts or H4 charts.
Time: The forex market is open 24/7 except for the weekends and national holidays while on the other hand, the stock market is only available to traders for a few hours per day.
Location: The foreign exchange is a decentralized market with no central location. It has three major periods which are called the Tokyo, London, New York, and the Sydney sessions,
The stock market, on the other hand, has various markets around the world such as the London Stock Exchange, New York Stock Exchange, National Stock Exchange of India, etc.
Ease of trading: Forex traders can take advantage of the volatility of the market and make money going short on their trades sometimes even as short as 15 minutes.
The stock market, however, has a lot of rules and regulations in place which restricts traders from taking the advantages of the market volatility like the forex trader.
Broker Commission: Forex brokers usually take advantage of spreads that are accumulated during trades whereas stock brokers charge spreads as well as commissions from traders.
Room for growth: If you are the type of trader who wants to keep a one-track mind and not get side-tracked by too many options then forex is the best bet for you as it only deals with currency pairs.
However, if you feel like you might get bored on only one financial instrument and would like to explore more options then you should consider trading stocks and equities.
Looking at the comparisons above, one can easily say that forex has the upper hand and it is more profitable than stocks.
Conclusion: Why Forex Trading Is Indeed More Profitable
Both forex and stocks are great in their own right but when it comes to being more profitable out of two, then the forex vs stock comparison will always favor fx trading.
Fx has fewer restrictions than stocks as its market is a decentralized one that provides scalping and day trading opportunities to everyone that takes part in it.
Fx trading also works in terms of macroeconomics and those traders who are extra cautious about transaction costs will also find that fx trading suits their trading style much better than trading stocks.
Furthermore, fx traders have the feature of high leverage which gives them the opportunity of reeling in more profits with their short term trades.
The forex market is also known to be highly volatile meaning that the possibilities of prices fluctuating are higher there. This can prove to be risky for traders if not played right but it can also prove to be extremely profitable.
Further proof for the extreme profitability of forex can be understood by the example of George Soros who was able to make $1 billion during the UK crisis of 1992.
All Soros did was go short on the Pound sterling which landed him that huge profit overnight!
There are many more forex traders like Soros who made it big on the forex market by sticking to their strategies and playing smart.
If you practice hard enough and develop your trading skills then even you might end up becoming the biggest fx trader in the world.