Choosing between trading forex vs. stocks typically depends on your financial goals, trading temperament and risk appetite, as well as various other factors. In either case, having a working knowledge of what moves the market in the instruments you trade can make a significant difference to your bottom line as a trader.
Since these two financial markets differ significantly in their mechanics and fundamentals, knowing how to trade stocks or forex properly and developing a sound trading strategy makes sense before you put any substantial amount of capital at risk.
In this article, Benzinga explains the differences among the two popular financial markets, their benefits and drawbacks and how these relate to your particular trading style and strategies. Whether you are just starting to trade or have years of trading under your belt, keep reading to find out which of these two markets offers the best opportunities for you.
Differences Between Forex and the Stock Market
One major difference between forex and stocks is regulation and oversight. High-quality, blue chip stock trading on centralized exchanges tends to have much more oversight from regulators than currency trading, which largely occurs in the unregulated over-the-counter forex market.
Depending on your jurisdiction, trading forex may be much easier to get started with and more lucrative than trading stocks. To help you decide which market would be preferable for your trading style, Benzinga has listed some of the major differences between the forex vs. stock markets below.
Market Trading Hours
A major historical difference between the two markets is the hours you could trade them. While electronic trading platforms connected to today’s major stock markets typically let you trade high-quality stocks outside regular market hours, stock markets generally have limited official opening hours, as well as pre-market and after-market sessions.
For example, market hours for the New York Stock Exchange (NYSE) and Nasdaq stock markets start with the pre-market session at 4:00 a.m. EST, followed by the regular trading session that runs from 9:30 a.m. EST to 4:00 p.m. EST. The after-market session then runs from 4:00 p.m. until 8:00 p.m. EST.
In addition to having stock trading access during the limited regular trading hours for the various regional stock markets, you may be able to access broader stock trading hours if the stock is dually listed on a European or Asian stock exchange or if it trades via an electronic communications network (ECN) such as Instinet, NYSE Arca and SelectNet.
Unlike the stock market, the forex market trades continuously 24 hours a day throughout its trading week that stretches from the Sydney open at 4 p.m. EST on Sunday to the New York close at 5 p.m. EST on Friday.
Because of time differences, the world’s four primary forex trading sessions of Sydney, Tokyo, London and New York open at different times and overlap in some cases, which can present various trading opportunities. Forex day trading strategies typically require a trader to select the best timeframe to trade in the currency market since it trades continuously all week.
According to many traders, the best times to trade forex occur during the overlap between the European and American sessions because of increased liquidity and large volume of trades. Times to avoid trading forex are just after the New York close when the Asian session has not gotten into full swing in Wellington and Sydney because of reduced liquidity that often leads to wider dealing spreads.
Liquidity and Trading Volume
Liquidity refers to the extent to which financial instruments can be traded without significantly affecting their price or exchange rate in the case of currency pairs. Because of the forex market’s sheer size, constant activity and ease of buying and selling, currency traders can take advantage of unparalleled liquidity. This feature contrasts sharply with the stock market where certain restrictions may apply that make trading more complex.
Periods of heightened instability can lead to reduced liquidity and trading volumes in both markets. However, the forex market's massive scale generally allows it to maintain higher liquidity levels than the much smaller stock markets, even during times of high volatility. Its deep liquidity makes the forex market suitable for day trading.
Factors that contribute to the exceptional liquidity of the forex market include:
- Size: With its average daily turnover exceeding $7 trillion as of April 2022, according to the Bank for International Settlements (BIS), many participants can trade forex around the clock.
- Activity: Continuous operations from Sunday afternoon until Friday evening enable nonstop trading.
- Ease of buying and selling: Transactions occur directly between parties via telephone and electronic networks that greatly facilitate trading activities.
Leverage
Leverage can be a powerful tool that enables traders to magnify their market exposure given a particular trading capital investment. While leverage is available in both the stock and forex markets, substantial disparities exist concerning the maximum leverage ratios permitted.
Retail forex traders living outside the U.S. may be able to use very high leverage ratios of up to 1,000:1 at online brokers based in certain jurisdictions, while Interbank forex traders generally use credit lines to trade on rather than margin deposits.
In the U.S., however, forex traders can only leverage trades up to 50:1 in major currency pairs and 20:1 in other pairs because of regulatory legislation passed by the Board of Governors of the Federal Reserve System in 2010 (12 CFR Part 240.9).
In contrast, a much lower leverage ratio of only 2:1 or lower is permitted when trading U.S. stocks due to the Federal Reserve’s Regulation T (12 CFR §220). Despite that, you may be able to trade contracts for difference (CFDs) on stocks at higher leverage ratios depending on where you live.
The main benefit of leverage is that it can magnify trading profits, although that is offset by the elevated risk you take if adverse market swings occur. Novice traders must exercise caution when using high leverage ratios especially if they do not yet understand how to manage risk effectively.
Market Volatility
Volatility is defined as fluctuations in asset prices (or exchange rates in the case of currency pairs) over time. Wider market fluctuations imply increased opportunities for trading profits but simultaneously pose greater risks to your trading capital.
Although stock markets tend to be more volatile than currency markets overall, both these markets can exhibit differing amounts of volatility depending on multiple external factors and influences, as detailed in the following section.
Successful stock and forex traders can both take advantage of higher market volatility by devising appropriate strategies tailored to active market conditions where levels are shifting regularly.
Market Influences
Market dynamics are governed by various elements that influence decision-making processes among traders and investors. These factors include geopolitical tensions, economic data releases, monetary policy shifts and natural disasters that can affect both markets.
Critical drivers in the forex market include supply and demand imbalances, macroeconomic indicators, breaking news stories, central bank interventions, monetary policy changes and geopolitical shifts.
The main drivers for stock prices include individual companies' performance metrics, industry trends, regulatory announcements and Initial Public Offerings (IPOs), which can directly affect equity valuations. Stock prices can also react strongly to a host of economic and fundamental factors that can impact their issuing company and market sector.
In addition, stocks’ performance and earnings routinely get reviewed by brokerage analysts whose recommendations can strongly influence retail investor sentiment towards particular stocks.
Going Long or Short
In the forex market, since you are always trading one currency against another as part of a foreign exchange transaction, you always maintain a short position in one of the currencies involved in a currency pair. If you are particularly bearish on any individual currency, you can sell it versus the U.S. dollar, as well as against other currencies by trading cross-currency pairs.
Going long a company’s stock in the equity market generally involves buying it with cash deposited in your stock brokerage account. In contrast, going long a particular currency pair via an online broker typically involves buying a certain amount of the base currency and selling the corresponding amount of the counter currency at the market exchange rate using funds deposited in your trading account as collateral.
Going short a currency pair in the forex market is generally much easier than selling a stock short. Going short a currency pair involves selling the base currency and buying the counter currency with the goal of buying it back later at a lower price.
In contrast, short selling in the stock market entails first borrowing the stock at interest, generally at the broker loan rate, and then selling it in the stock market. The profit (or loss) of the transaction is the difference between the original sale price and the price paid by the trader to cover the short position, plus any interest paid to the owner of the stock that was borrowed for the time that the bearish position is held.
Short selling in the stock market can be especially challenging if the stock to be shorted is in high demand and so becomes difficult to borrow. Stock loaners typically raise the interest rate on in-demand stocks, which would increase a short seller's overall transaction costs.
Which is More Profitable, Forex or Stocks?
Profitability when trading depends heavily on personal objectives, the availability of opportunities and trading aptitude, as well as on other elements directly influencing the market you are trading. Therefore, the question asking whether the stock or forex market is more profitable to trade cannot be answered definitively. Instead, you can seek insights into the pros and cons of trading both markets under varying circumstances.
While many people invest in stocks for long-term capital gains, very few currency market operators would consider themselves a forex investor. Most forex traders have a rather short-term perspective when it comes to their trading activities.
When it comes to the ability to generate profits, the forex market can provide superior accessibility owing to its round-the-clock market operations, high leverage ratios, respectable volatility levels, tight dealing spreads and relatively low barriers to entry. These attributes render it suitable for quick-thinking market operators pursuing returns through frequent speculative trading.
Conversely, equity markets cater predominantly to patient and strategic investors who prefer to accumulate gradual wealth backed by fundamentals. Over extended timeframes, blue-chip stocks historically deliver consistent appreciation rates despite occasional setbacks triggered by cyclical downturns or corporate mismanagement.
In essence, neither market unequivocally surpasses the other. Instead, making informed choices arrived at by assessing your strategies and trading style appropriately based on an awareness of your unique situation will help you determine which market is best for you when it comes to generating trading profits.
Correlation Between the Forex and Stock Markets
When it comes to correlations between the stock and forex markets, it makes sense that when a country's economy and stock market perform better than others, its currency usually becomes more popular since people want to buy it.
On the other hand, if the country and its stock market are experiencing hard times, then the opposite happens and the currency loses popularity and decreases in value compared to other countries' currencies. However, these connections might not always be obvious to someone who does not look closely at the correlations between these financial markets.
Market circumstances linking currencies and stocks can arise from mutual exposures shared among multinational corporations and cross-border investments. By being aware of currency correlations, savvy traders can discern underlying patterns that signal prospective market developments.
For example, positive correlation relationships tend to imply simultaneous growth or decline within paired trading instruments. In contrast, negative associations suggest inverse relationships, which can offer a hedge against losses incurred elsewhere.
Combining stock and forex trading disciplines within a single speculative portfolio can potentially enhance your overall market diversity and minimize the risks inherent in more targeted trading activities. Still, your success will require you to understand the details of cause and effect that connect these two financial markets and result in their observed correlations.
Will Forex or Stock Trading Suit You Best?
As explained in this article, forex and stock markets differ significantly in terms of their liquidity, volatility, mechanics and complexity. The huge and largely unregulated forex market boasts unmatched liquidity, allowing swift trade execution at any time during the trading week due to high transaction volumes.
The forex market exhibits volatility, creating frequent opportunities for profit. In comparison, stocks typically display greater volatility, which carries associated risks. Stocks require deeper fundamental analysis that takes into account individual firms' financial health and market sector dynamics.
As you have now discovered, both markets offer pros and cons depending on your preferences as a trader. Forex trading can suit more focused short-term speculators who use technical analysis and are keen on exploiting exchange rate changes enabled by higher leverage and no restrictions on buying or selling. In contrast, stocks may appeal more to long-term investors who can perform detailed fundamental analysis and prioritize steady account growth over time.
Despite the differences between these popular financial markets, common threads bind them together. Understanding fundamental drivers like the supply and demand balance, interest rate adjustments and geopolitical developments can help traders navigate both markets more successfully. Mastering core market analysis, risk control and money management methods, as well as cultivating discipline and emotional intelligence, tends to pay dividends in whichever market you choose to operate in.
Whether you plan on venturing into the retail forex market or diving into stock trading, remember that successful trading generally calls for ongoing education, meticulous strategic preparation, the willingness to take risks and wise judgment about which risks to take. Armed with this insight, you stand better prepared to chart a course toward greater financial freedom and security as a financial markets trader.
Frequently Asked Questions
Is forex trading better than stock trading?
Neither forex trading nor stock trading is universally better than the other. Instead, the best market choice for you to trade depends on your preferences, personality type, skills, resources and ability to adapt to shifting market cycles.
Is trading stocks easier than forex?
Generally speaking, stock trading might appear less intimidating than forex trading initially if you have greater familiarity with it and already have a stockbroker account, although forex trading is easy to learn and involves quite straightforward mechanics. The analysis of both markets requires comparable skills, although the forex market has fewer tradable assets than the stock market, which tends to make focusing on the best trading opportunities easier.
Is it worth getting into forex trading?
If you have the spare time and risk capital available along with sufficient motivation, dedication, discipline and humility to apply to your learning process, then forex trading could be well worth your time invested. Still, adopting sound risk and money management practices remains a key element of success no matter what market you plan on trading.
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About Jay and Julie Hawk
Jay and Julie Hawk are the married co-founders of TheFXperts, a provider of financial writing services particularly renowned for its coverage of forex-related topics. With over 40 years of collective trading expertise and more than 15 years of collaborative writing experience, the Hawks specialize in crafting insightful financial content on trading strategies, market analysis and online trading for a broad audience. While their prolific writing career includes seven books and contributions to numerous financial websites and newswires, much of their recent work was published at Benzinga.