February 8, 2021 | AtoZ Markets – Stocks and Forex (foreign exchange), are two of the most popular financial markets in the world. No doubt, the purpose of trading any of these markets is to make as much money as possible.
However, one market isn't universally harder to trade than the other. They both require study and practice to master. When someone tells you that a market is harder to trade, they are usually speaking about their personal preference.
The market that's easier or harder for you to trade will depend on:
- Knowledge: It can be harder to trade stocks or Forex when you don't have in-depth knowledge of the industry.
- Interests: Which market are you more interested in? If you like trading in a certain market, it will be easier for you to do the work necessary to succeed.
- Personality: Consider which market will work better with your personality. Your trading personality will play a huge role in your success.
Hence, it’s a good idea to think once in a while about whether stock or Forex trading is more suited to your trading strategy, financial goals, and risk appetite.
Without further ado, let's dive in and take an objective look at stocks and Forex, so you can figure out which one will be the best fit. First, we'll discuss their similarities and differences as well as their pros and cons.
At the end of this article, you'll decide which market is easier or harder for you to trade.
Similarities Between Stock and Forex
For a trader to succeed in stock and Forex trading, he or she must garner adequate experience as well as knowledge around trading. Traders must also plan and prepare in advance in order to get started and tread cautiously. Below, find some of the similarities between Forex and stock trading:
- Trading Platform: Both stock and Forex trading is carried out via brokers who in turn offer their highly advanced platforms for trading or offer proprietary software that offers a smooth and hassle-free trading experience. Hence, it’s crucial for traders to opt for brokers based on their trading preferences and style.
- Fundamental Analysis: Traders must conduct an in-depth fundamental analysis in order to trade Forex as well as stocks. While stocks require a trader to study and learn more about different companies and their income statements, in the case of Forex trading, the traders must analyze the global economies and data or figures announced by different countries on a regular basis.
- Technical Analysis: Both Forex, as well as stock trading, require traders to conduct technical analysis for successful trading. While Forex currencies keep fluctuating on an off and on basis, the stocks keep changing their directions as well.
Differences Between Forex and Stock Trading
In addition to the above-mentioned similarities, there are several differences between Forex and stock trading as well. Below are a couple of differences that traders must take into account before trading both stocks and Forex currencies.
- Leverage: When it comes to trading Forex, traders must simply create a Forex trading account and trade with a 2:1 leverage. However, in order to leverage in the stock market, traders must first create a margin account.
- 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. Forex trading, on the other hand, is different, traders always have a surplus amounts of currencies for trading.
- Paired Trades: In the case of Forex trading, the currencies get quoted in different pairs. As a result, traders need to be aware of the economic condition of both currencies. Additionally, their fundamental issues are different for both markets. However, when a trader purchases shares/stocks of a company, his/her are majorly concerned whether the stock’s value would increase or not. Thus, they’re less worried about the stock values of other organizations. Additionally, the Forex market is much more sensitive to the economic and political situations within different countries unlike stock trading that is less immune to such foreign conditions or issues.
Stock Trading Pros and Cons
- Stocks Can Be Easier to Understand
For some traders, it's easier to understand what a company does. This makes the research process more logical. You look at financial statements, research the products and see how the sector is doing.
- Thousands of Stocks to Choose From
If you like the thrill of digging through a ton of stocks to find a few hidden gems, then stock trading may be easier for you. For some traders, it can be like a treasure hunt. Since there are so many stocks out there, there's a very good chance that something will be tradable.
- Low Account Minimums
You can open a stock trading account for as little as $500, at some brokers. This allows you to get your feet wet and understand the mechanics of placing a trade.
- High Transaction Costs for Small Accounts
If you have a small account and are only trading a few shares, then the commission on each trade will be large, relative to your account size. For example, let's say that you have a $1,000 account and buy 10 shares of a $25 stock, and your commission is $7 per side ($14 total). The commission ends up being 5.6% of your total position size.
Your stock will have to go up to $26.40 before you start making a profit. This puts you in the hole from the beginning.
- Market is Only Open During Certain Hours
If you are in a timezone where the stock market is open at an odd local time, it can make it much harder to trade. Trading when you are tired can lead to mistakes and poor decisions.
- Pattern Day Trading (PDT) Rule
As mentioned above, if you want to be a serious day trader in the stock market, you need at least $25,000 in your trading account. This can be a lot of money for some traders, especially when you are first starting out. Since most new traders blow out their first account anyway, this is also a lot of money to put at risk.
Read also: Determining the Better Trading Market Between Stocks and Forex
Forex Trading Pros and Cons
- Limited Number of Currency Pairs
Just focusing on a few markets every week is appealing to some traders. For some people, this is the biggest reason to trade Forex. You don't have to set up a screener or comb through hundreds of stocks every week.
- Higher Leverage
You can get as much as 100:1 leverage from reliable Forex brokers. This allows you to put less money in your trading account and keep most of it at a bank, where it's much safer. Even US brokers that only offer 25:1 leverage still give you more leverage than stockbrokers. When you have the ability to leverage your money, you can grow it faster.
- Low Transaction Costs
Most Forex brokers make money on the small spread and don't charge a commission. This amount is tiny, compared to the commissions you pay at an online stockbroker. So if you will be starting with a small trading account, Forex can be the better choice.
- No Pattern Day Trader (PDT) Rule
In the stock market, the PDT Rule limits small account traders from making more than 4 intraday trades, within a 5-day period. In order to trade more than 4 intraday trades during that timeframe, you need to have at least $25,000 in your account. There's no PDT Rule in the Forex market. You can take as many day trades as you want.
- Small Lot Sizes
If you trade nano lots, you can take the right amount of risk, even with a tiny account. Forex brokers also provide micro, mini, and full-sized lot sizes. One of the reasons that the success rate with small trading accounts is so low in most markets, is because the minimum lot size is huge, relative to these small accounts.
For small account traders, his makes Forex a more viable option than most futures markets and can be a better option than putting your money in the stock market.
- Low Account Minimums
You can open a stock trading account for as little as $100 at some brokers. Obviously, you won't make a full-time income with such a small account, but it can help you get started and learn the basics.
- Market is Open 24/5
There can be plenty of opportunities to trade, regardless of where you live. Of course, the most price movement comes during the London and New York sessions. But there can be opportunities to trading in the Asian session too.
This gives you a wide range of times to find trading opportunities.
- Higher Leverage
New traders can have a tendency to use too much leverage and blow out their accounts. If you don't understand how to control risk, then higher leverage is dangerous.
- Limited Number of Pairs
If you like the thrill of searching through thousands of stocks, you might find Forex boring. You will be looking at the same number of pairs on a daily basis.
- Currencies Can be Harder to Understand
There are so many factors that affect currency prices, that it can seem daunting. For traders who like to make fundamental (based on economic data) trading decisions, the Forex market can be a little overwhelming.
- Market is Open 24/5
Although this is a potential benefit, it can also be a downside. For some traders, this can lead to over-trading. They think that they have to trade, just because the market is open.
Read also: Why is Stock Trading More Famous Than Forex?
How would you answer? Stocks or Forex, which is harder to trade? From what we've explained so far, the stock market may be the simplest option to understand when compared to Forex. It also requires a significant amount of capital. However, if your funds are limited, Forex trading may be best. With Forex, you can start simply by focusing on one currency pair at a time. Regardless of which option you choose, study, and develop a strategy before you begin to invest