Forex trading refers to the process of buying and selling currencies with the goal of generating a profit. Stocks investing, on the other hand, is the process of buying and holding shares of publicly traded companies like Microsoft and Alphabet. In this article, we will compare the two and identify their pros and cons.
Forex trading vs. stocks investing
As mentioned, forex trading involves buying currencies for a profit. In the real world, you can convert your dollars into euros if you expect that the former will lose its value. In this case, if the dollar loses 10% against the euro, you will generate a profit. A trader can hold his position for a few seconds or years, depending on their trading strategy.
Stock investing, on the other hand, is the process of buying and holding a company’s shares for a long period. The goal is to buy a stock lower and exit when it rises. For example, people who bought Facebook’s stock in its Initial Public Offering (IPO) have seen their funds soar by more than 300%. Similarly, people who invested in Warren Buffett’s Berkshire Hathaway’s stock 50 years ago have had more than 1,000% in returns.
There are experts on both sides of the debate. On the one hand, there are people who strongly believe that investing is the right approach to making money. On the other hand, there are people who strongly believe in being a day trader in the forex industry.
How the forex market works
To understand the better option between forex trading and stocks investing, let us look at how the two strategies work.
The forex market is one of the biggest markets in the world. Indeed, recent estimates place the daily volume of the amount of money traded in the industry to be more than $5 trillion.
The industry works in a relatively simple way. First, there is a forex broker who provides the trading platform and all the tools. Second, there is an electronic communication network (ECN) that brokers use to execute the order. Finally, there are buyers, sellers, and liquidity providers.
As a trader, your goal is to predict the future direction of a currency pair. For example, if you believe that the EUR/USD price will rise, you will initiate a buy order. This simply means that you are buying euros and selling the dollar. If you believe that it will fall, you can short it, where you buy the dollar and sell the euro.
How stock investing works
Stock investing and stock trading are different concepts. In stock investing, the participants typically buy a company’s shares with the goal of holding them for a long time. The process starts with an in-depth review of a company, where the investor looks at several details about the firm. These include revenue, growth, management, industry, and valuation.
After doing this review, the person creates an account with a stockbroker like Robinhood, Schwab, and TD Ameritrade and buys the stock. When the order is executed, these companies usually use intermediaries known as market-makers to execute them.
What moves stocks?
There are several factors that cause stocks to move up and down. The most popular ones are:
- Industry change. Some industries tend to change or be disrupted for a long period. For example, the retail industry has been disrupted by e-commerce.
- Earnings. Investors tend to pay close attention to a firm’s earnings. A company’s stock will keep rising if it reports strong earnings quarter after quarter.
- New initiatives. A stock will rise if a company is successful in implementing its new initiatives.
- Taxes and interest rates. Companies tend to do well in a period of low taxes and high interest rates.
Other things that move a company’s stock price are management changes and mergers and acquisitions.
Difficulty in predicting future moves
A key benefit of day trading the Forex market is the difficulty of predicting the future. For example, in 2019, no one knew how challenging the following year would have been.
Therefore, in March 2020, many stock investors lost a fortune when stocks crashed. Forex traders had a good period because of the volatility that happened because of the pandemic.
Another good example is the changes going on in the energy sector. A few years ago, ExxonMobil was the biggest company in the US by market cap. Today, it has become the 33rd biggest company in the world.
Forex is a 24-hour business
A common benefit cited for day trading forex is the time factor. The forex market opens every Monday and closes every Friday evening. Therefore, as a day trader, you have more time to trade the currencies of your choice.
The stock market, on the other hand, is open every Monday to Friday for a few hours every day. As such, if you are a part-time stock day trader, you will have difficulties finding the right time to trade.
Still, as a stock trader, you don’t need the market opened for a long period because you just buy a stock and hold it for a long period.
Forex is a bit expensive
Another difference between forex trading and stocks investing is the fees charged. As a stock investor in the US, you don’t pay a penny to buy and sell shares. That’s because many brokers don’t charge a fee as they attempt to battle Robinhood.
While forex brokers don’t charge a fee directly, they make money through the spread. A spread is simply the difference between the bid and ask prices. Therefore, since traders open several trades every day, the total cost could be high.
There are other differences between forex trading and stock investing. For example, with stocks, you can benefit from the dividends and the buybacks that companies make. With forex, you only make money when a trade goes your way.
Also, forex trading is relatively riskier than long-term investing. It also requires a long learning path. Therefore, if you are torn between the route to take, take time to weigh the pros and cons of each model.