The stock and foreign exchange (forex) markets are popular places for people who buy and sell stocks. Some traders like the forex market better than the stock market because they can use more leverage. But some people like the rules and regulations of the stock market.
Traders with a margin account can use as much as 2:1 leverage when buying and selling stocks. But day traders who open and close their positions on the same day and keep more than $25,000 in their account can trade up to 4:1 leverage. Before you can do this, you also have to meet some requirements.
Not every investor can get a margin account; that is what you need to use the stock market as a loan. Trading in forex is very different. You must open a forex trading account before trading with leverage. There are no requirements to meet. How much leverage you can use depends on the brokerage, but most traders can use up to 50:1 leverage.
When trading currencies, they are always talked about in pairs. You have to think about both the economy of the country whose currency you are trading and the economic health of the nation whose currency you are trading against.
Does one country have more job growth, a higher GDP, or better political chances than another? Sometimes, political and economic changes in other countries have a bigger effect on the forex markets. The U.S. stock market isn’t immune to political events, but geopolitical issues tend to have less effect.
The currency market is easier to get into than the stock market. Monday through Friday, traders can trade stocks for almost 24 hours a day, but it’s not easy to get to all the markets. Most small investors buy and sell stocks through a brokerage in the United States. The main trading time is from 9:30 a.m. to 4:00 p.m.
There is a smaller market for trading “after hours,” but it has less liquidity and other problems, making it less popular than trading during regular business hours. On either hand, it is much easier to do Forex trading Monday through Friday, 24 hours a day. There are a lot of places to trade forex around the world, and it’s always trying to trade time in one local time or another.
When you trade stocks, you purchase shares of companies, which can cost anywhere from a few dollar bills to hundreds of dollars. Price on the market changes based on supply and demand. Trading on the forex market is not like trading on other markets. Even though a country’s currency supply can change, a lot of currency can always be traded.
All of the major world currencies are very liquid. This means that trade activity has a very different effect on the prices of the two markets. The price of the stock may change if 10,000 shares are bought. This effect is stronger for smaller companies with fewer shares on the market than for big companies like Apple.
On the other hand, forex trades from several million dollars in a major currency are unlikely to have much or any effect on the market price of that currency. There is too much supply for a single transaction to have much effect.
Which Should You Choose?
When Forex Trading Is Most Effective
Because there aren’t as many rules on the forex market and you can use a lot of leverage, it’s easy to keep track of big trades. A new forex trader has access to many of the same tools as an experienced trader, but a stock trader needs to get special training and save up a lot of money before they can trade like the pros. Forex trading is for you if you want to start trading large amounts of money immediately.
When Stock Trading Is Most Effective
It can be easier to understand how to trade stocks. Even though a bigger picture of the economy is always helpful, the idea behind buying a stock is simple: you are buying a piece of a company. This, along with the many rules, can make some traders feel more at ease and help them focus on their trading strategy.
Because of how currency pairing works, however, short traders may find that trading stocks have more risk. When the stock market goes down, you can make money by selling shares you don’t own. However, this comes with additional risks.
At least, in theory, one risk of shorting a stock is that you could lose as much money as you want. Your broker will likely require you to close your short position. Still, most financial advisors warn against shorting for everyone, and many of the most sophisticated investors use stop-loss orders and limit orders together to limit this risk.
Most investors know more about the stock market than forex, which may be a comfort. Others will like the higher risk/reward ratio that arrives with the high leverage levels and lack of rules in the forex market. No matter your choice, exchange carefully and use stop-loss orders to limit your risk.