Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.
Forex Vs Stocks - 5 Things To Consider Before You Trade
BY TIO Staff
|January 14, 2022The recent increase in the accessibility of trading tools and brokers such as TIO Markets UK has democratised access to the financial markets. Just about anybody in the world with an internet connection can now trade and monitor markets for a wide range of asset classes.
Two of the most popular markets for traders today are the forex market and the stock market. These two asset classes have several similarities but some crucial points of difference. Let’s learn more about these markets, identify some of the key points to keep in mind when deciding which one to trade, and consider which market maybe better suited to your trading goals.
What Is Forex?
The term “forex” is short for the foreign exchange market, which essentially refers to the market where one currency is traded for another. A popular example of this would be the EUR/USD currency pair, where the euro is traded for the US dollar or vice versa. Forex brokers also often offer the opportunity to trade in other instruments such as precious metals, like gold or silver and energy instruments such as oil and gas.
People who trade forex aim to buy a currency pair when they think the price will rise, and look to sell the pair when they think that the price will fall.
Why Are MT4 And MT5 So Popular?
Several factors have propelled MT4 and MT5 to become the world’s most widely-used trading platforms. Perhaps their single most popular attribute is their wide range of technical analysis tools, such as indicators and chart objects. In particular, traders who rely on studying price action via charts tend to prefer these two platforms.
In addition to technical traders, the platforms have become hugely popular with those seeking to take advantage of trading robots, called Expert Advisors, which execute trades on the platform automatically, based on a predefined set of rules. This lets traders capitalise on market moves without any human effort, and they are used by both beginner and advanced traders. The MT4 and MT5 communities even have large marketplaces where users can search for and purchase expert advisors that work on each platform. Many of these are also available for free.
For these primary reasons, MT4 and MT5 are especially popular amongst intermediate and advanced traders.
What Is The Stock Market?
Stocks, often referred to as shares or equities, are units of ownership in businesses that are publicly traded. People who own shares in Amazon, for example, own a small portion of the company itself, no matter how small that percentage may be.
The profit an investor makes from the shares depends on the success and thus the value of the company. If the company turns a large profit or is sold for a large amount of money, the shareholder stands to gain a considerable return on their investment. On the other hand, if the company fails, the share itself becomes less valuable and the investor stands to lose money on their investment.
Stock markets are institutions that facilitate the trading of stocks between investors or between a company and investors.
In this article, we’ll be discussing stocks traded as CFDs (contracts for difference). This means that the stock trading we’re referring to is synthetic, and doesn’t refer to the actual ownership of companies.
Let’s take a closer look at the factors you’ll want to consider when choosing which market is better suited to you.
Market Hours
The times when each market is open to trade is a major point of difference between the two asset classes and is often a relevant deciding factor when traders are deciding which is best for them.
Forex Market Hours
The forex market is available to trade 24 hours a day, 6 days a week. That’s because the forex market spans several major currencies around the world, from the West (US dollar) to the East (Australian dollar). This means there are lots of hours when volatility picks up, such as when the New York, London and Asia market sessions are active.
Stock Market Hours
Stocks are only available to trade for a limited time throughout the day. US stocks are mostly available to trade between 9:30 am and 4:00 pm New York time. The good news for European-based traders is this means that stocks are tradable up until 9PM GMT. But this still leaves a relatively narrow window over the week during which traders can find liquidity.
Winner
Forex is the clear winner when it comes to the availability of trading hours. Because of its near-constant open-hours, forex trading is far easier to fit into your schedule, whether you have a day job, a night job, or whether you’re a shift worker.
Liquidity
Liquidity refers to the volume available in a particular market, or how active a market is. When we talk about liquidity, we can refer to an entire asset class, such as forex, or a specific instrument, such as EUR/USD or Amazon shares. The more “liquid” a market is, the more money is being traded to buy or sell in the market.
Forex Liquidity
The forex market is the most liquid in the world, with an estimated USD 6.6 trillion being traded daily. Trades involving the USD account for nearly 90% of all of this volume. That includes pairs such as the EUR/USD, USD/JPY and GBP/USD.
The reason liquidity is so important in the forex market is that it makes it far easier to enter and exit positions with minimal slippage. This is because there is nearly always a number of buyers and a sellers at or near the quoted price meaning that you can open or exit positions at any time very near the price you see on the screen
Stock Market Liquidity
In 2019, roughly USD 61 trillion in stock was traded around the world for the whole year, equivalent to around 10 days of forex trading volume. If you removed a drop from a bucket of water, that drop would be stock volume while the rest of the water would be forex.
This lower level of liquidity is rarely a problem if you’re trading high-market-cap stocks. However, if you’re trading low-cap stocks you may not be getting in and out of trades as easily as you’d like.
Winner
There’s no question that the forex market has the upper hand over the stock market when it comes to liquidity. It simply dwarfs every other market in the world.
As mentioned, don’t worry about this if you’re trading high-cap, popular stocks. However, if the liquidity isn’t there when you’re trading less popular stocks, this may lead to difficulty entering a trade, and more worryingly it can lead to slippage or difficulty exiting a trade.
Choice Of Instruments
The number of instruments available in a market can sometimes be an important consideration for traders. Some traders may want a wide range of instruments to choose from, while others would prefer to only have a handful of instruments on which to concentrate their energy and analysis.
Forex Instruments
Almost all forex volume is traded around just eight major currency pairs: USD, EUR, GBP, JPY, CAD, CHF, AUD, and NZD. Although TIO Markets UK offers 60 pairs to trade, our traders will invariably trade these major currencies exclusively. This means that in forex, there are very few significant instruments to focus your attention on.
Stock Instruments
The number of tradable shares in the world is far higher than the number of tradable forex pairs. At TIO Markets UK, we currently offer 160 stocks from the US, UK and Europe. This suits traders who want options to choose from or who are looking for diversity within an asset class.
Winner
If it’s the pure number of options you’re looking for, then stocks win the numbers battle hands down. If you value diversity and choice, and have time to do plenty of research, then stocks are the way to go. On the other hand, if you would rather limit yourself to a handful of major instruments, then you can trade the major forex pairs and use the constant volatility to keep trading those same pairs.
Volatility
Volatility refers to the amount of price movement of an asset or asset class over a short period. The more the market or the price moves over a defined period, the more volatile it is said to be.
Forex Volatility
Forex is often considered one of the most volatile markets in the world. This is down to a couple of reasons. Firstly, there are so many macroeconomic factors that can affect the price of a currency pair, that any forex instrument is likely to encounter one or several of these on any given day.
Secondly, Forex is often traded using leveraged instruments such as CFDs which essentially means that your profit & loss on a given trade is moving by more points than the market itself, magnifying the appearance of volatility.
For this reason, forex is said to be more suitable for day-trading and short-term trades, where traders target fast profits with a high-risk-high-reward approach.
Stock Volatility
Stocks can sometimes also be considered to be highly volatile instruments. The stock market can often be quite sensitive to global economic conditions. Consider that during one of the worst days of the pandemic, the Dow lost nearly 13% in a single day. For a month and a half between early February and late March, it lost 37%. And then in a few months, it recovered all of those losses to reach new all-time highs.
Having said that, stocks (and especially blue-chip stocks) are often considered to be stable investments that will tend to steadily increase in value over time. That’s the reason pension funds invest in so many established stocks – because they are relatively safe and stable.
Winner
Forex is overall the more volatile market, especially when considering leverage. However, this doesn’t mean it’s the “better” market to trade. This one really depends on your objectives, your trading style, and your risk appetite. For short-term trading with a higher risk appetite, forex can be considered. For longer-term, low-leverage trades with a more predictable price pattern, stocks may be more attractive.
Suitability For Analysis
When trading any market, there are two broad categories of analysis that can be applied in order to create a strategy. Technical analysis is the study of historical and live price charts to find patterns and try to predict future movement. Fundamental analysis refers to the analysis of underlying microeconomic and macroeconomic trends, such as government policy or company balance sheets.
Forex Analysis
As we’ve mentioned, forex is the largest market on the planet, both in terms of volume being traded and the sheer number of participants. As there are many more players influencing the forex market than any other, the key levels of support and resistance in technical analysis are generally more respected. For this reason, forex is a popular market with technical traders.
When it comes to fundamentals, tracing the many thousands of economic, political and data factors that influence a global currency can be very tricky indeed, though not impossible.
Stock Market Analysis
Generally, the stock market tends to be driven by fundamentals more so than technical considerations. However there are still a multitude of factors that affect the price of a stock, so traders can always rely on a few dozen fundamental factors to make an informed decision on a trade, such as the CEO, the balance sheet, prior product success and consumer sentiment.
Winner
There’s absolutely no winner here. The market that suits your style of analysis better will very much depend on you. If you prefer to sit down and research fundamentals, then stocks may be the preferable market for you. That’s because although stocks still have many variables influencing their price, you generally have a few dozen factors and data points you will want to consider for any particular stock.
On the other hand, if you’re a technical trader, you may be more angled towards the forex market. Analysing charts can be more of a critical factor in trading forex, so if you enjoy chart analysis or have technical analysis skills, then you may find that forex is better suited to your style and more “compliant” with your analysis.
Cost of Commissions
This one’s easy to figure out! If you open a VIP Black account with TIO Markets UK, you pay zero commissions on all instruments: forex, stocks, energies or any other asset.
You can open a VIP Black account here.
Or if you’re not yet sure which market you want to trade or which account type you want to open, why not open a demo and try trading each market for yourself.
Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.
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