Forex vs stocks – which one is better for day traders and why?

Traders have the option of choosing between a plethora of assets – From stocks and bonds to futures and forex, the capital markets offer products for all investment objectives.

Stocks and forex have emerged as two of the most popular investment vehicles.

Stocks are shares of companies that are tradable on a stock exchange. Forex refers to the fiat currency markets where currencies are exchanged for a profit.

While functionally different assets, stocks and forex are deeply rooted in macroeconomic performance and investment trends that shape decision making across investing communities.

Trading forex vs stocks at a glance

Traders aim to profit from short-term price fluctuations of assets caused by market volatility. Factors such as shifting market trends, legislative changes, macroeconomic conditions can sway the markets and traders wish to be on top of things and trade the assets with the highest short-term potential.

The performance of stocks and forex are deeply correlated with the economy and keeping track of industry news can be the difference between gains and losses for traders.

Trading stocks refers to the process of buying and selling company shares to profit from price differences. Any number of factors, such as financial and operational performance, managerial and/or regulatory changes can affect the bottom line of companies, which is reflected in the changing stock prices. Traders can place various orders and construct complex strategies to gain the maximum profit from market volatility. Stocks of large, well established corporations are highly liquid and easy to trade.

Forex trading, on the other hand, refers to the trade of fiat currencies to profit from factors such as changing market conditions, trade balances, economic forecasts and interest rates, among others.

Fiat currencies tend to be far more volatile than individual equities and patterns and trading trends, as well as the highest level of liquidity means that traders can actively profit from the ever-changing economic performance of countries from around the world.

The process of trading these assets can be wildly different, but the importance of the core principles of having a disciplined strategy, diversification and technical analysis cannot be understated.

How are stocks and forex different from each other?

Some key point of difference can be easily identified between stocks and forex, such as:

• Asset volume – Traders have the option of choosing from thousands of stocks from dozens of exchanges, while forex pairs are limited to a few hundred currency pairs
• Trading fees – Stock brokers may charge commission fees per stock trade, while forex brokers may also charge inactivity fees on accounts. The rates of commission charges also differ from broker to broker
• Leverage – Forex brokers offer much higher leverage than stock brokers. It is common to see 100:1 leverage offered by forex brokers
• Sources of income – For long-term holders, some stock may offer dividend payments aside from the capital gains, while forex trading is limited to capital gains
• Volatility – Forex markets are far more volatile than stocks and therefore provide much more opportunity for active traders than equity markets
• Trading strategies – Forex trading allows for strategies such as scalping and swing trading due to high volatility, while stocks are more geared towards long-term investing
• Accessibility – Trading stocks and forex require a verified and funded brokerage account, which is straightforward to set up and most brokers do not require minimum deposits to start trading

What are the similarities between stocks and forex?

Despite their many differences, trading stocks and forex can be similar in a few ways, such as:

• Correlation to economic performance – The performance of forex and equity markets is tightly correlated with overall economic sentiment and performance
• CFD trading – CFDs, or contracts for differences offer traders the opportunity to trade both stocks and forex from their brokerage accounts. CFDs offer the opportunity of trading the price difference without owning the asset. Trading CFDs is not available for US and Canadian residents
• High volatility – While forex may be more volatile than stocks, both asset classes are generally quite volatile. Despite the fact that some major currency pairs and blue chip stocks have significantly lower volatility than their counterparts, most of the currency pairs and equities are characterized by high volatility, especially during market uncertainty, as opposed to the more stable fixed-income securities
• Short-term opportunities – High volatility means higher upside potential, which can present great opportunities for day-traders to profit from the short-term price movements

How to choose between stocks and forex

Choosing between stocks and forex might seem like a difficult decision for an inexperienced trader, but the decision lies more so with the objectives of the trader than the asset classes themselves.

To choose which is best for you, consider the following factors:

• Your trading objectives – What are your objectives and how much returns do you expect from trading? Traders who are interested in high frequency trades during all hours of the work week are better off trading forex than stocks, while traders who are content with making a couple trades per week or buying and holding for a while are more likely to choose stocks
• Your budget – Depending on your budget, your initial objective might not be to withdraw your trading proceeds at all. If you wish to start low and build up some capital, stock trading might be more up your alley, as stock offer price movements of higher percentages than forex in a given trading session
• Use of leverage – If you are interested in gaining leveraged positions, you can borrow money from your broker and increase buying power. Forex brokers offer a significantly higher leverage and some might even offer as high as 500:1, while most stock brokers offer 2:1
• Prior experience – Depending on your trading experience, the concepts behind trading forex or stocks might not be too familiar. Stock trading is more accessible for absolute beginners, as the factors affecting the shares of a business can be somewhat easier to grasp than the multitude of macroeconomic factors at play on the forex market
• Trade frequency – If you plan on trading very frequently and executing multiple trades each day, forex trading is your best bet. The US stock markets have a rule regarding pattern day trading which prevents traders whose accounts are valued at less than $25,000 from making multiple transactions on all five trading sessions of the week. The restriction can bar traders with less capital from actively trading stocks
• Trading strategy – Much like your investment objectives, having a solid investment strategy can make things much more linear. Depending on the trading strategy you wish to follow, either asset might be of more use. Scalping and day trading is much more favorable with forex than it is with stocks, and the aforementioned capital restriction further enforces that sentiment

Risk and reward considerations

To choose whether stock or forex is the better option for you, it is best to first consider your appetite for risk, as well as your investment objectives.

If you are looking to trade less frequently and your goal is to preserve and expand your capital, stocks are your best bet. They typically have a longer time horizon and picking the right ones can bring substantial returns in the long run.

If you have a sizable cash position and want to capitalize on market volatility with less downside risk, forex trading can be of interest.

Forex is more volatile in the short term than stocks, and it is best to know just how much risk you are willing to undertake before you enter your first trade.

While forex can be volatile, major pairs like USD/EUR, EUR/GBP, USD/CHF are much more stable than other pairs and have a less severe downside risk.

The upside for forex is also rather limited. While stocks can increase exponentially, such margins for forex are exceedingly rare.

Conduct the potential risk and rewards associated with trading stock and forex to determine which one is the best fit for your trading objectives.

Trading accessibility

While the technical accessibility is not an issue for stocks and forex, newcomers might feel intimidated by the terminology, complex strategies, charts, and patterns used in trading these assets.

Forex trading strategies are complex and exchange rates can be affected by a number of different factors. The heavy reliance on technical indicators can deter some traders from trying their hand at forex trading altogether.

The concepts around stocks are somewhat simpler, as they are shares of well-known businesses whose financial performance is public and can be endlessly scrutinized. The short-term trading results also depend more so on company news than other factors beyond the traders’ control.

However, stock prices can vary greatly from company to company and in the case of brokers that don’t offer fractional share ownership, some stocks may be inaccessible to retail traders.

Stock trading is only available during market hours, which are typically between 9 a.m and 4 p.m on weekdays. Forex trading is available 24/5, making it more accessible for traders.

Trading fees & prices

While most brokers charge commission fees on stock and forex trading, these fees can vary from broker to broker. It is important to consider your budget and the fee structure of your broker to ensure that unsuccessful trades do not start chipping away at your funds.

Both stocks and forex have bid-ask spreads. These should be considered during trading, especially when the markets are highly volatile or when the asset is in short supply. The spread is typically quite low and is only ever noticeable when trading in high volumes.

Regulations

The key difference between forex and stock regulations is the party being regulated. When trading forex, the broker is the one that bears the regulatory burden and has to comply with any legal requirements in place. While this is also true for stock brokers, the companies listed on the exchanges are subject to strict regulations as well.

Public companies have an obligation to provide financial reports and be transparent with their operational performance.

Due to this key difference, forex and stock brokers are often regulated by different governing bodies from the same jurisdiction.

Use of leverage

If you are planning on using leverage when trading, consider the amount of leverage offered by your broker and whether you can comply with the margin requirements that come with that.

Stock brokers typically offer much less leverage and are content with a 2:! Leverage offering to traders, while forex brokers offer leverage as high as 100:1.

Leverage is money borrowed from the broker and while it can certainly increase the upside of a successful trade, the downside for an unsuccessful one is aso amplified.

Main takeaways

Capital markets offer traders the opportunity to trade a wide number of assets. Stocks and forex are two such assets that happen to be attractive for short-term trading due to their volatile nature.

To choose between stocks and forex and decide which is more suitable for them, traders must consider their performance objectives, budgets, the features offered by stocks and forex and then decide which suits them best.

Factors such as leverage, fees, volatility and accessibility are important to consider when choosing between stocks and forex.

FAQs on forex vs stocks

Are stocks better than forex?

Day trading stocks comes with its restrictions and stocks are less volatile than forex, thus, forex is more favorable for day trading than stocks, which comes with capital restrictions on pattern day trading.

Can I day trade stocks?

Pattern day trading is only available if the trader’s account is worth a minimum $25,000. Unless the account meets this criterion, the trader will not be available to day trade five days a week and will have to take a gap day to not violate the rule and risk restrictions on their account.

Is forex more profitable than stocks?

As a day trading strategy, forex could be more profitable than stocks, however, a stock trading account that is eligible for pattern day trading could overperform forex in the long run. The issue of profitability depends more on the trader’s experience and anticipation, rather than the characteristics of the assets themselves.