Last Updated: June 07, 2020
Beginning traders often get confused about their start point as there are numerous options available to everyone when it comes to trading which includes currencies, commodities, stock trading, etc.
If you have ever wondered whether penny stocks trading is better than forex trading when it comes to beginners, then read on to clear all misconceptions about the subject and find out why forex is said to be the better alternative of the two.
Traditionally, penny stocks are recorded under $5 or less per share. They are generally quoted over the counter ( via Pink Sheets or OTC Bulletin Board) as well as on security exchanges.
Penny stocks are usually used by companies that generally operate on a small level market and don’t have a huge capital invested in them.
Penny stocks are said to be best suited for people who have limited funds to invest. They are also highly speculative and a high-risk investment that often requires the investor to do extensive research on the subject before making any moves.
Now we will take a look at forex trading and compare that with penny stocks trading.
In simple words, Forex is the marketplace that allows the trades of various currencies from all over the world to be conducted daily on its platform.
It is said to be the most liquid marketplace in the entire world where trades worth trillions of dollars take place on a daily basis.
Unlike penny stocks where trades are conducted over the counter, forex trading takes place electronically. There is no centralized location of the forex market and it is open 24 hours a day, 5 days a week only closing for national holidays.
Investing in penny stocks is quite a simple process. All you have to do is choose a broker and select which stock to trade. Beginners can opt for the OTC Market’s official website and start their trades from there.
Traders who are completely new to the game can choose to paper trade for a small period to gain experience before commencing trade in real currency.
Asking someone who has prior experience in this field to mentor you is also a good strategy that will help you get on your feet quickly. Be sure to save plenty of time and money as penny stocks are high risk and very speculative investments.
In the foreign exchange market, you will find many big and small players trying to make a dent on the market. These may include amateur traders, professional traders, governments, banks, businesses, firms, etc.
Forex traders buy and sell currency pairs such as EUR/USD, USD/JPY, NZD/USD, CHF/AUD, etc.
In forex trading, the trader sells one currency which is called the base currency to buy a different currency which is called the quote currency.
The amount in units that a trader has to pay is determined by the exchange rate of the quote currency.
To trade forex, one has to open a trading account with a registered forex broker that has all the legal permissions to act as a broker in that country or region. These broker accounts will have pre-determined deposit fees for you to pay if you want to commence fx trading from their platform.
On the other hand, penny stocks do not require any fee from the trader. However, there are no boundaries to how much a broker can charge traders which is why proper research needs to be done before striking a deal with any broker.
As mentioned earlier, penny stocks are said to be more suitable for traders who are starting at the extreme bottom of the barrel as it attracts people who have a ridiculously low budget.
Furthermore, investing in penny stocks requires in-depth research on the trader’s end as they are high-risk investments. Those who have the time as well as the patience to analyze this highly speculative market for seemingly low returns can invest in it.
Keep in mind that penny stocks are often valued at $5 or less than that amount and getting a successful trade requires a lot of hard work from the investor.
On top of all this, the Pink Sheets stocks don't need to be registered with SEC (Securities and Exchange Commission) which leads to lesser regulations on penny stocks which means that they can withhold crucial information about themselves from the public.
Therefore, penny stock traders need to have a sharp eye and an experienced mentor to guide them on their journey as a penny stock trader as legitimate information is crucial for making good investments on this platform.
For a complete beginner, all of this can prove to be a very huge disadvantage as the time and money they invest in this trade may not be as fruitful as they want it to be.
This leads us to the following question: is forex the safer bet for beginners?
Right off the bat, the foreign exchange market is worlds apart from the penny stocks market. Traders on this platform have a clear outline of what currencies they are going to be trading in.
One of the best features of forex trading is the low leverage price that is offered to investors making it possible for anyone to dive into this world with as little as a few hundred dollars in investment capital!
Unlike penny stocks, forex is a global market that is registered and regulated by the FCA (Financial Conduct Authority) that ensures that everyone has a fair and ethical environment to conduct their trades.
Since it is run on an electronic platform that is connected to the internet 24/7, forex traders have a variety of tools and software at their disposal which enhances their trading experience.
These tools such as indicators and calculators are very helpful for beginners who are new to the world of trading making it easier for them to learn everything related to forex trading in a short time,
Furthermore, forex traders have access to open platforms such as the forex factory where they can learn from the experiences of other successful traders and avoid making silly mistakes while conducting trades themselves. This eliminates the requirement of a mentor to guide although having one on your side is always an advantage.
In conclusion, forex is the best bet for beginners.