Forex Vs Stocks – Which One Should You Trade?
The foreign exchange market and stock market are both heavyweights in their respective category. But with the hundreds of financial products these markets encompass, from Yen pairs to tech stocks, it is impractical to diversify beyond any one market at least until you get solid footing as an investor. Here are the pros and cons of each market that will help you decide where to allocate your capital.
Pros & Cons of Trading Forex
When it comes to market liquidity, the foreign exchange market is king. With daily activity reaching $4 trillion per day, Forex is undoubtedly the most liquid financial market. Liquidity, for new investors, means that you can easily get in and out of trades without having your order mispriced because your broker couldn’t find an opposite side to match it.
Forex is also accessible 24/5, unlike the stock market which has a closing bell every day. Since exchanges are opening and closing at different times around the globe, you will always find one or two exchanges that are trading. This gives busy people an opportunity to trade even during late hours.
Many Forex brokers also provide higher leverage options to their users. You can find FX accounts leveraged up to 200:1, meaning that for every $1 you put into your account, you can control $200 worth of financial product. Using the right approach, an investor can grow his/her leveraged account at a much faster pace.
A drawback when trading Forex is the lack of regulation, which means that anyone with a large enough account can manipulate prices. Because Forex is relatively new, there is no regulatory board that exists to protect investors from dirty tactics used by larger players including banks and hedge funds.
Leverage is another drawback and can act as a double-edged sword. By increasing buying power, you also increase the amount you can potentially lose on the trade. Without proper position sizing on your trades, you can get margin called frequently, especially during volatile times.
Pros & Cons of Trading Stock
For starters, the stock market has posted the highest historical returns on investment. Between late 1920s up to 2010, the average ROI on stocks was at 11 percent compared to the 3.66 percent ROI generated by T-bills.
New investors can also find a mountain of free advice and information on stocks. This valued content can be found online at blog sites and leading finance websites like Yahoo Finance and CNBC.
The stock market is also a great investment channel for long-term growth. The power of compounding returns and dividends can generate significant wealth over the long period. For example, a $50,000 put into stocks with a modest 8 percent ROI per year can turn into $233,047 in 20 years.
Risk tolerance is another notable benefit of trading stocks. Investors with a low risk profile can adjust their investment approach and only invest in proven brands with trustworthy track records, such as Exxon Mobil. For investors who are fine with taking on more risk as long as they get higher ROI potential, invest in growth start-ups and tech companies like Google.
As with any market, stocks are not completely resilient to risk. Even with the best strategy or the most advanced software, some trades will still result in a loss on your account balance.
The stock trading setup is also slightly intimidating and complicated for first-time investors. The data flow appears on multiple windows and someone working with only one computer screen may have to frequently switch to different windows to keep updated.
When it comes to profitability, what market you’re into only plays a small part. Your strategy and work ethic will prove to be the predominant factors that drive you to success.