When it comes to investing or trading, probably one of the first questions that comes to mind is whether to invest in stocks or to invest in the currency markets also known as Forex. One of the biggest reasons some traders (and me personally) prefer Forex to the stock market is higher leverage capabilities. We understand that on the other hand, others may prefer the regulatory safeguards of the stock market.
Still, we are sure Forex trading has some benefits over stock trading. Here is a summary of some of these benefits:
Higher Leverage
In stock trading, traders with a margin account may use as much as 2:1 leverage. However, day traders who open and close their positions within a single day and maintain an account balance of more than $25,000 can trade up to 4:1 leverage. There are also some qualifying requirements before you can do this. This is because not every investor is approved for a margin account, which is what you need to leverage in the stock market.
Forex trading is very different. To qualify to trade with leverage, you simply open a forex trading account. There are no qualifying requirements. The exact leverage limit depends on the brokerage, but many traders can expect to access as much as 100:1 leverage. This factor reduces the initial capital requirements for executing trades in the market.
Imagine having only a capital of $1,000 with a leverage of 1:100 to trade any of your favorite currency pairs. This gives you a maximum buying power of $100,000! The immense buying power could potentially give a good trader a comfortable cushion to trade and hopefully make good profits.
Lower Trading Costs
The costs of trading forex are generally lower than trading stocks. This is due to the higher liquidity of the forex market relative to the stock market.
Higher Liquidity
When you trade stocks, you buy shares of companies that cost anywhere from a few dollars to hundreds of dollars. Market price varies with supply and demand. Trading on the forex market is different because the forex market is the most liquid financial market in the world. According to the Bank of International Settlements 2022 triennial survey, forex market turnover is now at a record $7.5 trillion daily. This figure far outstrips the daily turnover of the New York Stock Exchange (the world’s largest and most capitalized stock market).
Although the supply of a country’s currency can fluctuate, there is always a large amount of currency available to trade. All major world currencies are highly liquid, which means the two markets have very different price sensitivity to trade activity. Stock purchase of 10,000 shares may impact the stock price. This effect is particularly powerful for smaller corporations with fewer shares outstanding, as opposed to giants like Apple.
In sharp contrast, forex trades of several hundred million dollars in a major currency will most likely have little—or no—impact on the currency’s market price. There is too much supply for any single transaction to have too much of an impact.
24/5 Trading
Different stock markets have their specific trading times. The forex market is open for trading 24/5, round-the-clock between Sunday at 10 pm UTC and Friday at 10 pm UTC. In contrast, stock markets have specific trading hours outside of which trading cannot occur. They are not 24-hour markets.
Enhanced Volatility
The forex market is more volatile than the stock market. Volatility is a measure of short-term price fluctuations, so it follows by extension that the trader will be presented with more trading opportunities in forex than in the stock market.
Enhanced volatility allows scalpers and day traders to open and close their positions quickly and still have the potential to walk away with good profits. The fact that the forex market operates on a 24-hour basis also helps to produce several windows of volatility within a trading day. This is unlike the stock market, where the windows of volatility are usually limited to the market opening and the last hour of the trading day.
Conclusion
The internet has opened the doors to active traders and investors around the world to participate in a growing variety of markets. The decision to trade stocks or forex is often based on risk tolerance, account size and convenience.
If an active trader is not available during regular market hours to enter, exit or properly manage trades, stocks are not the best option. However, if an investor’s market strategy is to buy and hold for the long term, generating gradual growth and earning dividends, stocks are a practical choice. The instrument(s) a trader or investor selects should depend on which is the best fit of strategies, goals, and risk tolerance.
