Your money sleeps in the bank and that’s why they charge you maintenance fees. If you decide to open a deposit to compensate, you hardly receive a return for the current low interest rates. Therefore, it is advisable to look for alternatives to this scenario.
Trading the markets may be the solution, but if you are a beginner trader you may face this dilemma: Forex or stocks?
When you start out in the world of trading, you are often faced with this crucial choice early in your career. In fact, before embarking on the activity of trading in the markets, it is still necessary to choose the instrument that is convenient for us and that is most favorable to meet our expectations.
This dilemma is equivalent to deciding whether to trade Forex or the stock market. Let’s find out together how we can make this decision!
Investing in Forex or Stock Market – Introduction
Your money may find itself resting in the bank with lower and lower rates. However, you can make sure to change this without taking reckless risks. The rate of inflation is increasing more than interest rates. Therefore, it is normal that you are looking for an alternative to invest your money.
This is where the option to invest in stocks or Forex comes into play to make your savings grow slowly or quickly, assuming the risk that best suits your style.
If you want your savings to evolve, now more than ever you have the opportunity to do it for yourself.
The first step is to select a market to invest in.
Forex vs Stocks – Definition
In this article we will study the selection criteria related to the problem “Forex or stocks” that represents the two largest stock markets in the world, namely: Stock Market and Forex.
The Spanish stock market is represented by the IBEX 35 stock index and the Forex market by the best-known currency pair: the euro dollar.
Before deciding why to invest in the stock market or currency market (Forex), let’s see what each of them consist of.
By definition, a share is a financial asset or security that shows that we are the owners of a small part of a company. The owner of the stock can claim a share in the profits of a given company.
Simply put, a shareholder is a co-owner of a company along with hundreds of other people with whom he shares profits and losses. The ownership interest is proportional to the number of shares a person owns compared to the total number of shares outstanding.
In the stock market, the titles of several companies that seek to raise capital are traded by selling a small part of the property.
Since humanity went from basing its economy on raw materials to industrial goods, the stock market became the undisputed champion of financial markets. However, towards the end of the 20th century, the course of digital progress created the perfect conditions for the emergence of a great rival, the Forex.
Forex is the abbreviation for Foreign Exchange (currencies) and refers to the market in which currencies from different countries are exchanged. In case you don’t know, a currency is a form of money generally accepted and issued by a government that is in circulation inside and outside the economy of a given country.
Money, or specifically currencies, serve as a means of exchange for goods and services, so they are a necessary tool to facilitate negotiations in all their forms, including those carried out in the stock market.
Let’s now see the difference between Stock Market and Forex!
Stock Market or Forex – Accessibility
Let’s now see some differences between these two markets in relation to their accessibility.
When comparing the stock market vs Forex, the geographical location is an important aspect to consider. For many years, access to the stock market has been limited to professional investors who had specific training and who could physically travel to the headquarters of the exchanges. This could further limit the decision to trade stocks rather than Forex.
However, since the Internet revolution, new opportunities have arisen that provide access to the financial world to all those who wish to invest their capital to achieve returns.
Today it is possible to trade stocks at the opening of the stock market, which represents a period of high volatility, or simply daily charts at the end of the sessions to invest in the long term. All this, without having to move from home and adjusting the schedules to our needs.
Forex trading, unlike the stock market, has never been limited to a specific location, which has contributed to facilitating access for anyone interested in this market. Negotiations take place over the Internet and people can access it anytime, anywhere, resulting in great accessibility.
Today, most financial trading, including stocks, takes place online and anyone with internet access can open a trading account with a broker and download software to read charts and trade with just a few clicks.
In this regard, both the Forex and the stock markets are easily accessible.
Forex vs Stocks – Margin and Leverage
A great advantage of Forex trading over stocks is the higher leverage offered by brokers. If you trade stocks spot, you don’t get leverage. However, if you invest in stocks, using CFDs (Contracts for Difference), you can trade on margin and have access to that leverage.
In this section we will detail the opportunities offered by both markets in terms of the required margins and available leverage.
Forex vs Stock Market Leverage Levels
In Forex, leverage depends on two variables: the client’s classification, that is, if he is a retail or professional, and the type of product.
For retailers, the leverage is between 1:20 and 1:50.
For professionals, the allowed leverage ranges from 1:10 to 1: 500
A maximum leverage of 1: 2 is offered on stocks
This means that a trader can open a larger position for a deposit the higher the leverage. But keep in mind that when trading with leverage you must understand the risks involved.
Leverage can be a powerful tool, but it can also quickly put an end to your activity as a CFD trader.
Therefore, a trading account to trade the forex market will require a much smaller minimum amount than an account to trade stocks. Margin flexibility and access to high leverage give Forex preference over stocks.
However, remember that the temptation to mismanage leverage to generate profit and high potential trades is normal among Forex beginners. This is so because it is a tool that allows you to multiply the profits with a small investment but also the losses when the market goes against us.
With low leverage levels it is very difficult to consume the entire margin of an account in a single trade. This can lead to excessive use of leverage and thus to higher losses (or profits) if the trade does not turn out as expected.
You must be extremely reasonable and use financial leverage wisely as part of risk management and a well-established trading strategy.
Forex or Stock Market – Spreads and commissions
Another factor to take into account when deciding whether it is better to invest in currencies or stocks are spreads and commissions as these will determine our final earnings.
By comparing the differences between stocks and Forex we can see that Forex brokers generally charge lower commissions. The main reason is the greater competition between them, and to stand out it is necessary to offer traders more flexible and advantageous costs.
Forex vs Stocks – Spreads
Another factor to take into account when deciding whether to invest in Forex or stocks are spreads, as these will determine our final earnings.
By comparing the differences between stocks and Forex we can see that Forex brokers generally charge lower commissions. The main reason is the increased competition between them.
Forex vs Stocks – Trading Hours
One of the biggest differences between Forex and Stock Market is the trading hours. The stock market is limited to the opening and closing hours of physical stock exchanges around the world. On the other hand, the Forex market is open to the public for 5 days a week and 24 hours a day, no matter where you are.
Naturally, the volumes of each currency increase during certain hours, but at no point are traders forced to work for a specific period of time. This is a great advantage if you have a conventional job.
The Forex market not only remains open all night, but it maintains its liquidity and much of its volatility, elements necessary to carry out short-term operations. You can literally trade whenever you want. However, you need to be careful, because just because you can do it doesn’t mean you should.
This practically means that, if due to new information you have to modify your active operations, you can do it in Forex without having to wait for the market to open the next morning, thus avoiding the highest spreads and the possible gaps that would occur if we invest. in the stock market.