Should I Trade Forex or Stocks?

Should I Trade Forex or Stocks?

“Forex or stocks?”, “Which one is better?”, “Should I invest in forex or stocks market?”

Stocks and forex or foreign exchange trading are the most popular two markets, besides commodities, noble metals, and many more. The question that comes from every beginner’s mind, and maybe yours as well (and definitely mine), is “Should I trade forex or stocks?” Or maybe, “What is the difference between these two?” So, here’s a bit of insight about these two markets, and know what suits you well.

Foreign exchange, or forex, is a global decentralized market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. (Wikipedia). Forex, in terms of trading volume, is the largest market in the world, with the average daily volume (ADV) of USD 5.5 trillion in 2014, as reported.

The foreign exchange market assists international trade and investments by enabling currency conversion. For example, it permits a business in the United States to import goods from European Union member states, especially Eurozone members, and pay Euros, even though its income is in United States dollars. It also supports direct speculation and evaluation relative to the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies (Global imbalances and destabilizing speculation [2007], UNCTAD Trade and development report 2007, Chapter IB).

Forex market movement is very rapid, especially on its market time. For example, USD moves actively when the New York market is open, JPY does when Tokyo market is open, and so on. This makes it easy for beginners who want to learn technical analysis (analysing future prices with aids of recent or past graphs and indicators). Furthermore, the global forex market opens 24/7, excluding Saturdays and Sundays and local holidays. It means traders can basically trade from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York) on normal weeks. This makes it even easier for beginners to practice their technical analysis skills as they have more time “messing around” with the indicators and stuffs, hence becoming more familiar and hopefully being able to find their own method of analysing.

However, currency trading involves the global economy, which means, a slight change in a single country’s economy can affect another currency, thus can affect the world economy. Especially if the country has a powerful economic power, like the Eurozone countries or the US. This is because in this globalization era, countries are interconnected with each other. They do import and export trades, economic and political cooperation, and agreements with one another. It means, when one country’s economy crumbles, it makes a chain reaction and can make another one’s crumble as well. This makes the fundamental analysis harder as traders have to be able to see not only one’s economic condition, but also how its policy affects other currency, then another one, then another one, and so on. Basically, fundamental analysis in forex trading requires us to predict the whole economic world based on recent policies made by great economic powers of the world, The Fed and the EU for instance.

Stock market, on the other hand, is the market in which shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets. Also known as the equity market, the stock market is one of the most vital components of a free-market economy, as it provides companies with access to capital in exchange for giving investors a slice of ownership in the company (Investopedia).

What makes it different from forex? Well, obviously, the thing that is traded is different. In stock market, we trade shares of companies. The shares that investors buy from a company later become the respective company’s capital for expanding and developing its business. In exchange, investors get a percentage of the company’s ownership, proportional with the amount of the shares they buy. This can make a little company grow into a big one, thanks to the capital investors give to them. Hence, the shares’ value increases and investors get the advantage.

One advantage of equity market is that when we buy some shares from a company, we are basically also the owner of that company, and when the company makes profit, we also get a portion of that profit, called dividend. It means, if we want, we can let our share sit for a while and we will still get passive income from the dividend. It’s not the case when we trade forex. When we buy a forex indice, for example EUR/USD, we just convert our USD currency t0 EUR, and just wait until the price goes up then we sell it. We don’t get any income if we don’t actively do transactions in forex market.

Another advantage of stock trading is that it’s fundamental analysis is easier. Not like forex where we should observe the global economy, in analysing equity market we can only look at several companies, looking at one or two sectors in which the company runs, and the economic climate of the country or the region. We don’t need to know the growth in farm industry sector when we are buying technology company’s shares. But, we must be aware of things that affect that sector. For example, health sector relies quite much on agriculture sector, as some medicines made by pharmaceutical companies need some kind of plants as their main ingredients.

So, forex or stocks trading? To sum up, forex trading is suitable for those who want to make profit “faster” and more dynamic market, whereas stock trading is suitable for those who are willing to invest their money in some companies and get dividends (and also actively do transactions). Both fields require expertise in order to be successful and they both offers high-paying careers as bankers, traders, and many more. You can be good in both of them, but in my opinion, being an expert in one is more important than being good in two.

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