The contemporary financial marketplace is becoming increasingly diverse, both in terms of the range of asset classes available and the numerous ways in which you can access the marketplace.
Two of the most popular markets are forex and stocks, with these boasting a combined market capitalisation value of trillions. The forex market alone was worth in excess of £2.409 trillion in 2019, with this number continuing to grow as the foreign exchange becomes increasingly accessible.
In this post, we’ll compare forex and stocks from an investor perspective, while asking which option is right for you?
Forex Trading – The Pros and Cons
The forex market is home to currency trading, while it’s renowned for its margin-based nature and incredibly high levels of liquidity.
Investors can also access inflated leverage in the forex market, while being able to trade currencies as derivatives and achieve profitability without assuming ownership of an underlying financial instrument.
When it comes to leverage, forex brokers will typically offer you access to 50:1 leverage when trading currency. This is highly beneficial, as it enables you to open positions that are considerably larger than your initial deposit.
The forex market is also incredibly volatile, and this can be good or bad depending on your perspective. For example, this provides a measure of short-term price fluctuations, and forex scalpers or day traders rely on volatility to drive sustained profits.
However, it’s possible to incur huge and disproportionate losses when prices move against you, particularly if you don’t protect your positions with stop losses and similar measures.
What About Stock Trading? The Pros and Cons
Stock trading deals with the buying and selling of equity and company shares, either as individual stocks or through investment vehicles such as contracts for difference (CFDs).
Typically, however, stock trading enables investors to buy shares that provide a tangible and secure store of wealth, which can be held for an extended period of time to achieve long-term gains.
Dividend stocks also offer long-term value and a secure source of income, which is ideal for risk-averse investors who are looking for reliable and bankable returns.
There’s also some flexibility in the market in the form of exchange-traded funds (ETFs), which are based on premium stock market indices and offer investors broad market exposure and natural diversification.
However, stocks are only available through limited trading hours (unlike the 24-hour forex market), while investing in individual shares can leave you at the mercy of wider economic factors and conditions.
The Last Word
Ultimately, forex trading is synonymous with short-term gains and profiting from daily price fluctuations, and therefore ideal for experienced investors who have a healthy appetite for risk.
Conversely, stock trading is a considerably less volatile and more risk-averse option, whether you hold long-term shares in blue-chip firms or trade high-end entities like the S&P 500 through ETFs.
Over time, you can even look to combine assets from both markets within a single, diverse portfolio, especially as you continue to gain experience and boost profitability.