Invest In Forex Or Stocks? What’s The Difference?

Forex and equities markets are closely connected to each other. However, to a trader, they’re different turfs. Which market you should trade depends on your preferred time horizon, the level of your competitive edge, and a lot of other dynamics such as costs, ease of access, and profit potential.

Time horizon is the length of time you decide to hold a position. This could be months, years and even decades on the higher side and days, hours, minutes and even less on the lower side. Competitive edge refers to how faster and smarter you are compared to other traders. While this should be roughly the same regardless of the market, forex and equities differ qualitatively on this dynamic as well.

Let’s see how.

HOW TRADING DIFFERS IN BOTH MARKETS

The two markets differ in the number of trading alternatives available. The forex market mostly centers around seven major currency pairs. There are other pairs as well, which are but just different combinations of the same currencies. The stock market, in contrast, has thousands of alternative options to choose from. Finding what the best value is from among thousands of stocks is hard work. Currency trading is much easier in this regard. Follow the economic and political news of seven countries, and you can trade all these currency pairs.

Stock markets sometimes shrink in volumes and activity. The 2015 stock market selloff is an example, which was set off by global financial events. In such circumstances, you may find it hard to open and close positions. Moreover, inventiveness and hard work won’t be enough to make a profit in such a declining market. In forex, however, a currency gaining or losing in value is an equally good opportunity. Likewise, while stock traders can’t short a position in a declining market, forex traders don’t face any such constraints.

WHICH IS EASIER TO TRADE?

People who think trading forex is much easier compared to trading stocks outline the following reasons: Stocks are the most followed market in the world. This means you are competing against more people who work harder and do more research and analyses. The market has been studied for a long time and is relatively efficient.

There is a lot of insider trading in stocks. Insider knowledge gives traders a huge edge over opponents. Forex has nothing similar to insider knowledge. If anyone knows what a central bank is going to do tomorrow, it doesn’t amount to much of an edge over others because, for one, the market is simply too huge. Second, people smart enough to follow major economies might already have had reason to suspect something of the kind.

Central banks are responsible for a big part of the currency flows in forex. They are not trying to maximize profits but trying to stabilize their national economies. If you follow the political and economic news of a country, you may be able to understand its central bank’s motives for an intervention. You could use this knowledge to benefit from the resulting price movements.

WHICH HAS MORE PROFIT POTENTIAL?

Imagine it is 1990 and you’re picking some stocks at random. Now, if you look at those investments in 2017, chances are at least one of them must have made you nice profits without you ever worrying about the investment during all this time. That’s because a business operates with the goal of making profits and if it succeeded, it would mean profits for shareholders as well.

Could you pick a currency pair at random and expect a similar return in future? Certainly no! That would be more like a gamble, and no sane trader would do that. With equities, you bet on a value-creating idea, which is a non-zero sum game plan. In a growing market, equities are likely to make you money even if you did nothing about it.

Forex is different. We’ll have to admit that forex has some zero-sum-game-like features to it. Your profit sometimes equals the loss of another trader. Also, while in principle it’s not impossible that your investment in an emerging market currency can give you windfall profits in future, nothing in forex models gives you enough confidence to make such big bets. Most of the legendary trades were smart moves that anticipated volatile movements in prices of major currencies in the short term, sometimes caused by large banks intervening in the market.

That being said, the most successful forex traders have made millions of dollars in a single day than what many stock traders make over weeks and months. Similar gains for the latter often mean much harder work in research and analysis. Some of them may even be privy to insider information. Therefore, it would be unjust to generalize in favor of equities when we discuss profitability.

SHOULD YOU TRADE FOREX OR EQUITIES?

It really depends on what your investment objective is, what your preferred time horizon is, and whether you have any edge over others.

No one type of asset class can be significantly easier or harder to trade than others, all things being equal, because a free market will ultimately find a new equilibrium that removes any advantage one has over others. But all things are never really equal, at least in the short and medium term.

Forex is much easier to get started with and the market is more liquid. You can choose your own preferred time of day to trade. You don’t have to be a forex analyst to trade and make money. However, to make a fortune a day in forex is going to take a lot more than wits and smartness.

Leave a Reply

Your email address will not be published. Required fields are marked *