Contributor, Benzinga
Updated: November 16, 2021
verified by Jay and Julie Hawk

Want to jump straight to the answer? The best forex broker for most people is definitely FOREX.com or CedarFX.

It’s never been easier to start trading in the financial markets. Advances in online brokerage accounts and charting software mean that you can earn money trading from the comfort of your home or office — it’s no longer confined to denizens of Wall Street or the Chicago trading pits.

When most people hear the word “trading”, they immediately envision people trading the stock market. However, forex trading has become increasingly attractive as the once-exclusive currency market has recently opened up to retail traders. But which is right for you? Stock trading or forex trading? We’ll take a closer look at the similarities and differences between stock trading and forex trading. We’ll also show you the pros and cons of each trading type to help you get started trading your asset of choice.

Stock Broker Comparison

Compare 3 of our top brokers in the chart below.

  • Webull
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    Intermediate Traders and Investors
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  • Moomoo
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    Active Traders
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  • Robinhood
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    Beginners
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Forex Broker Comparison

Compare 3 of our highly recommended forex brokers in the chart below.

  • Forex.com
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    Forex Investing
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  • TD Ameritrade
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    Options Trading
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  • Interactive Brokers
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    Global and Active Traders
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What is Forex Trading?

The word “forex” is short for “foreign exchange” and refers to a decentralized global marketplace for national currencies. You also might sometimes hear people refer to forex trading as “FX trading.”  A transaction in the forex market involves an exchange of one currency for another. 

Currencies trade in pairs in the forex market, and forex trading involves buying and selling currency pairs. In general, the goal of forex trading is to buy a currency pair when it’s undervalued and sell it when it rises in value, or sell when overvalued and buy back when the pair drops in value. 

Most countries issue their own national currency. The value of each currency varies in relation to other currencies. The rate at which currencies are exchanged in the forex market is known as an “exchange rate”.  Furthermore, the “dealing spread” for a currency pair is the difference between a market maker’s bid and offer exchange rates.  

According to the concept of purchasing power parity or PPP, two currencies find their equilibrium exchange rate, which is known as the currencies being at par, when a basket of goods costs the same in both countries given their currencies’ exchange rate.

If you’ve ever traveled abroad, you might have converted a small amount of the cash you brought with you into the country’s local currency and found that your money went further or was spent faster than at home.

For example, if a U.S. resident travels to England, they might find that the UK’s pound sterling currency is worth 1.4000 U.S. dollars. They might pay $2 for a bottle of water in London that would only cost them $1 if it was bought somewhere in the United States. If this relationship was observed for a wider basket of goods, it would suggest that the U.S. dollar is undervalued versus the British pound. 

Some long-term forex traders aim to take advantage of this difference in purchasing power among currencies by strategically exchanging an overvalued currency for an undervalued currency and then waiting for the market to shift toward equilibrium. 

What is Stock Trading?

Stock trading involves buying and selling individual shares of a company, called “stock.” A share of stock is a small piece of ownership in a company. 

While currency pairs have an exchange rate that moves frequently, shares of stock instead have a price that fluctuates in price throughout the day, week and month. Factors like a company’s management team, the overall state of the economy and the business decisions the company makes can all influence what each individual share of stock is worth.

Stock traders aim to buy a stock when it’s undervalued and sell it when it rises in value, or they might sell when a stock is overvalued and buy back when the price falls. There are 2 main types of stock traders who operate in the stock market for profit:

  • Active traders trade frequently and attempt to time their entry into and exit from the market to maximize trading profits. They often execute numerous trades in a single month and may hold their stock positions for hours, days or even weeks at a time before they decide to close them out. Most active traders consider the general market trend when it comes to technical analysis, as well as fundamental factors like quarterly earnings, company management and future demand for the company’s products when they decide which stocks to trade.
  • Day traders seek to take advantage of short-term price movements and don’t hold overnight positions in the stocks they trade. They can enter and exit a position within minutes or hold the position until the end of the trading session. Day traders usually don’t care about the inner workings or business prospects of the companies whose stocks they trade. They typically focus more on the volatility of a stock and what their technical analysis suggests for short-term price action. Some day traders might use fundamental events, such as a company’s quarterly earnings reports, to take advantage of the volatility generated by the event. 

Similarities Between Stock Trading and Forex Trading

Stock and forex trading are similar in some ways, although in forex trading you speculate on movements in a currency pair’s exchange, while in the stock market, you buy or sell a share of a company in the hope that its price will shift in your favor. Let’s examine some additional similarities and differences between these financial markets.  

Brokers

A stockbroker takes orders to buy or sell corporate shares on your behalf on a centralized stock exchange at a transparent price for a small fee or commission. Stockbrokers traditionally charged a commission for this execution service, although many major U.S. stockbrokers have recently eliminated such commissions.

A forex broker also executes orders on your behalf but in the decentralized forex market where currencies are exchanged. Also, the tradeable asset in a forex transaction is a currency pair that involves you buying one currency and selling the other. A forex broker usually does not charge commission but instead widens the dealing spread to make their money. 

Both stock traders and retail forex traders use brokers to facilitate their transactions. You can quickly create a stock or forex trading account online and begin trading as soon as you fund your account.  

While U.S. stockbrokers will generally offer access to the stock market, not every broker provides access to the forex market, so you might need to open a separate account with an online forex broker to trade currency pairs. To learn more about online brokers that offer forex trading, check out our list of the top forex brokers

Short-Term Trading 

Both forex traders and stock traders rely on relatively short-term trading strategies. A stock trader who’s trading with the intent to make a quick profit usually won’t be interested in holding onto his or her stock for years to come. Similarly, a forex trader only wants to hold a currency position until they can trade out of it for a profit.  

Technical Analysis

Technical analysis is a type of financial analysis that uses patterns and indicators to inform a trader when he or she should buy or sell an asset. Traders who use technical analysis to inform their trading strategy typically don’t spend a lot of time reading the news or researching a company’s business plan. Instead, they may look at candlestick charts for indicators that a stock or currency will drop or rise in price soon.

Both forex traders and stock traders primarily rely on technical analysis when they decide what they should buy or sell. Because the price of a stock or currency may change on a minute-to-minute basis, it’s important that you have a reliable technical analysis program to inform your trading. 

Differences Between Stock Trading and Forex Trading

Forex trading and stock trading also have a number of key differences you need to understand. Let’s take a look at some of the largest differences. 

Leverage

In the world of trading, “leverage” is the power to open and control a trading position that’s larger than the money deposited in your margin account as collateral. You might hear some traders refer to using leverage as “trading on the margin.”

Leverage is usually expressed as a ratio. For example, let’s say that you have $100 in your brokerage account and your online forex broker offers you 50:1 leverage. This means if you have $2,000 in your margin account, you can open a position 50 times larger or $100,000 in size. 

Leverage is a crucial part of forex trading because trading currencies just involves an exchange (a simultaneous purchase and sale of currencies) and not a purchase or sale like a stock trade. This means the actual value of a forex trade is initially very close to zero since one currency is exchanged for another at its current market value. Since the value of a forex trade is almost zero initially, the broker just needs to hold the margin deposit as collateral against the trader potentially incurring losses at some point in the future if the market moves. 

Furthermore, the forex market usually does not see massive exchange rate fluctuations and is generally less volatile than the stock market. Although each currency pair has its own volatility and average trading range, it is common for a currency pair’s exchange rate to change by just $0.0300 or 3 “big figures” in a single day. This means that you’ll typically need to trade positions of at least $100,000 to see any type of significant profit (or loss) on your forex trades. 

Using leverage makes it possible to profit significantly on forex trades without having hundreds of thousands of dollars to deposit. On the other hand, leverage magnifies your trading risk and can quickly wipe out your margin deposit if you make losing trades. 

Leverage ratios are generally much lower when trading stocks via stockbrokers than when trading forex at online brokers. You may only be able to find 2:1 leverage with many stockbrokers if you open a margin account. However, stocks also move in value more dramatically, which means that you need to hold smaller positions to see a meaningful move in value. 

Trading Hours

Forex traders have much more time to trade their market each week than stock traders since the global forex market isn’t centered around a single time zone’s typical business hours. The forex market instead has a series of trading sessions that correspond to cities that serve as major global money centers and have their own hours of operation. 

Let’s take a look at when these forex trading sessions are open.

  • The Sydney session opens at 5 p.m. ET and closes at 2 a.m. ET.
  • The Tokyo session opens at 7 p.m. ET and closes at 4 a.m. ET.
  • The London session opens at 3 a.m. ET and closes at noon.
  • The New York session opens at 8 a.m. ET and closes at 5 p.m. ET.

The forex market typically exhibits the highest liquidity when trading session hours overlap. However, the forex market remains open 24 hours a day from the Sydney open at 5 p.m. ET on Sunday until the New York close at 5 p.m. ET on Friday because there’s a global demand for making forex transactions that isn’t limited to a single time zone. 

When many people talk about stock trading, they’re referring to trading on the New York Stock Exchange (NYSE), the largest stock exchange in the world in terms of market capitalization. 

In notable contrast to the forex market, the NYSE is only open from 9:30 a.m. ET to 4 p.m. ET Monday through Friday. The NYSE is closed during the weekends, and it’s also closed during/observes major American holidays, including New Year’s Day, MLK Day, President’s Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving and Christmas. 

Market Size

Many traders prefer operating in the forex market due to its massive daily trading volume that confers an unusually high degree of liquidity and tight dealing spreads. For example, in April 2019, the forex market saw an average of about $6.6 trillion worth of trades each day. This makes the forex market the largest financial market in the world by far.

In comparison, the world’s various stock markets combined are much smaller than the huge forex market. In 2019, the NYSE only saw a yearly trading volume of $23.192 trillion, which works out to be an average daily volume of only $91.67 billion given 253 trading days. In the same year, all world stock markets combined had a yearly trading volume of $61.14 trillion, or an average daily trading volume of $244.61 billion. 

These numbers suggest that the forex market saw roughly 27 times the average daily trading volume of all the world’s stock markets in 2019. With volume such as this, you can be sure that liquidity holds at essentially any time of the day. Moreover, you will find that you are operating within a closed system that is difficult to sway outside of general economic movement. (There’s no meme currencies.)

Pros and Cons of Stock Trading

Before you decide to start trading stocks, be sure you consider the pros and cons of entering the stock market.  

ProsCons
Easy to get started. Almost every stockbroker in the United States offers some form of trading on the NYSE. This means that you’ll have more choices when it comes to your broker and more control over which platform you use.

A massive number of stocks to trade.
There are currently more than 2,000 different stocks listed on the NYSE and more than 3,000 stocks listed on the NASDAQ. This gives you plenty of choices when it comes to identifying trading opportunities. 

Higher volatility.
As a general rule, stocks tend to be more volatile than currencies. It’s common for a stock’s price to rise or drop by up to 5% each day, while a currency pair’s exchange rate may only rise or fall by a fraction of a penny. This allows you to earn more of a profit (or lose more money) without using leverage.
Pattern day trading laws. The stock market is regulated by the Securities and Exchange Commission (SEC), which regulates who can trade and when. Under SEC rules, only traders who have a portfolio balance of $25,000 and above can place more than 3 day trades a week.

Limited hours. TThe major stock exchanges are only open on weekdays from 9:30 a.m. to 4 p.m. ET. If you live outside of the United States (or on the West Coast) you might have trouble finding time to trade during the most volatile parts of the day.

Pros and Cons of Forex Trading

Forex trading also comes with a number of unique pros and cons.  

ProsCons
Fewer trading options. Are you overwhelmed by the number of stocks available to trade? There are only a few major currency pairs, so you can easily monitor all of your main trading choices.

Lower financial bar for entry. Unlike stock trading, there’s no legally regulated minimum balance you need to get started day trading forex. It’s even possible to get started trading currencies with as little as $50, which you can amplify considerably using leverage.

More liquidity. In order to sell a share of stock, someone else on the market needs to want to buy it. Most forex transactions are filled instantly thanks to the massive daily trading volume and near-constant supply and demand seen in the currency market.
The danger of leverage. Leverage can be a powerful tool for traders, and it’s almost always used when trading forex. However, the higher amount of leverage used when trading currencies can also quickly wipe out your initial margin deposit if you make losing trades.

Fewer platform options. Not every broker offers forex trading. This means that you may not be able to use the trading platform you prefer.

Choose Between Stock and Forex Trading

Whether you decide to start stock trading or forex trading, you’ll probably want to make sure that you have a strong technical analysis background to help you time trade entry points. Both forex trading and stock trading can rely heavily on short-term price movements, so having real-time charting software can be a valuable tool. Be sure to learn more about how you can get free forex charting software or the best stock trading software before you begin trading.

Frequently Asked Questions

Q
What are the risks of forex trading compared to stocks?
A

Stock trading uses fundamental research such as earnings to predict changes in prices. Forex is affected by geopolitical events, changes in monetary policy, country-specific issues and economics.

Q
Does stocks or forex have the highest amounts of volatility?
A

Stocks have higher amounts of short-term volatility than forex.

Related content: Forex Trading in Kenya

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