What's Better to Trade: Forex or Stocks?

Today, traders have a wide range of choices when it comes to what types of financial instruments they trade. Making a choice of which markets to participate in can be difficult, since there are many different factors that need to be taken into account.
Here, we look at the forex and stock markets, highlighting the differences that you should consider when choosing between the two.

Forex trading versus blue-chip investing

If you are looking for a market with high short-term profit potential – and significant accompanying risk – then you may find that the forex market is attractive. It offers high liquidity and significant volatility, meaning that prices can move substantially and that buyers and sellers are always available. This is attractive for short-term swing traders, who look to make profits on price movements that take place over a few days, as well as with day-traders who are looking to open and close profitable positions each day.
While it is perfectly possible to day trade highly-liquid blue-chip stocks – and many do – there is generally less volatility than in the forex market. On the other hand, blue-chip stocks can generate steady capital growth and cash dividends of up to 5% a year. It is possible to generate steady cash income in forex as well – through something known as a carry trade – but the risks are much higher than with blue-chip stocks. However, investors must remember that no stock is invulnerable – remember that GM declared bankruptcy as recently as 2009.

Leverage and capital requirements

Another key thing to consider when choosing between forex and stocks is the amount of money you have and the amount you can borrow to trade. This amount you can borrow is referred to as leverage or margin – and is generally about 2:1 for stocks. On the other hand, if you live in the US, you can get 50:1 leverage for forex trading – and this is low compared to other countries. What that means is that to open a $50,000 position, you only need to come up with $1000 if you are trading Forex, whereas you will need $25,000 if you are trading stocks. However, you should always be careful not to use too much leverage, no matter what you are trading. High leverage creates high risk, which is where a lot of forex traders get into trouble.

If you do want to trade stocks using considerable leverage, try stock options or futures. This is where you earn the right to buy or sell a stock at a fixed price in the future. The value of an option or future is based on the difference between the future price and the current price – rather than the entire cost of the underlying stock. When you add this to the fact that margin requirements can be as low as 5%, this gives a decent amount of leverage.
In forex, this type of leverage is much easier to come by and you can get leverage of up 400:1, however, as noted already, leverage is a double edged sword.