There’s a discussion that pops up once in a while that while I do not like to take part in it for reasons you will understand by the end of this article seems to get people extremely riled up. The discussion is of course about stock trading versus forex trading. Which one is better to be exact. Better is of course a subjective term as what matters most to one person will differ from the other. As someone who has straddled both sides of the fence I rather we look at the two across multiple parameters. Which is better will depend on which of those parameters matter to you.
The first difference between stocks and forex is what is traded in the markets. In stock markets, you take ownership of a part of a company. With forex trading you are buying into a position, that is two currencies pitted against each other, referred to as a pair. In essence, what you are expressing is an opinion on which direction the relationship between the two currencies will take. The forex market offers 27 major pairs. Contrast this with the 50 counters available on the ZSE, 442 counters on the JSE and the over 2800 companies listed on the New York Stock Exchange in the USA. You have a lot more variety in stocks.
What we mentioned above are the traditional or basic ways to trade on these markets. There are many more ways to invest in these markets which involve the use of derivatives. It would take too long to rifle through all the derivatives available on these markets but it should suffice to say that the forex market more options and therefore more complexity. We can also factor in leverage which is prevalent in the forex market but not so on stock markets. Leverage is simply put the process where a broker will lend you money to trade with based on the amount of money you have. This allows the trader to amplify their profit at a low cost.
Depth of information
A big part of trading successfully in any market is having the right information. In both forex and stocks having the underlying information is very important. With forex, the requirement for information is however much lighter than with stocks. For example to understand a currency pair you will need information on the two economies involved and perhaps current events impacting the currencies. With stocks to understand one company, you will need to do a deep dive into financial statements, which aren’t written with ordinary people in mind. You will also need to pay attention to the news as well wider economic information. Simply put, stock trading involves a lot more information.
In most places, the accessibility of the two markets is pretty much even. Zimbabwe is not the most place. As such the accessibility considerations are a little bit different. With a clampdown by many international providers transactions with Zimbabwean domiciled clients, your options may be drastically narrowed down. With stocks, you have the options of many different markets and therefore you can find the ZSE easily accessible while going further afield like the JSE or Botswana Stock Exchange may prove a little bit more difficult. Your chances of going for major American AND European stock exchanges are about as good as your chances of finding an international forex market broker that accepts Zimbabweans with arms wide open.
Risk and volatility
These two go hand in hand so we shall look at them together. Both markets put your money at risk. There’s the possibility that the stock you buy could experience a major price crash. Equally, it is possible to take a position in a pair that goes the wrong way. In this regard, the risk levels are about the same. However, we also have to look at the volatility of the markets. Forex markets because of their nature are more volatile than stock markets on average. If we then add on the complex variety of derivatives that exist in forex as a whole this complexity amplifies both the volatility and the risk. All things considered, stock trading is less risky and volatile than forex trading
Liquidity also plays a big part in evaluating markets. The forex market is large, it is a single cohesive combination of multiple markets around the world and as such operates almost around the clock. There is a lot of activity in the market and as such the market tends to make it easier to enter and exit positions. Stock markets are smaller localised concerns and a lot will depend on the stock market you are trading on. Tiny markets like the Victoria Falls Stock Exchange have proven to have very little liquidity with only one counter available though more are expected to list in 2021. A market like the ZSE with 50 counters offers better liquidity and the same can be said for the JSE or New York Stock Exchange.
Nally let’s look at the degree of involvement or intensity of trading in forex compared to trading in stocks. Both can be quite involving and we have already said that fundamental analysis in stocks involves processing a lot more information. Forex for the most part relies on technical analysis which is mostly done through charts and mathematical models. Many will find the charts easier because of the visual representation. Stocks also include technical analysis to the same degree where the data is available. Stock trading is ultimately a lot more involving and intense than forex trading.
Better is subjective because a lot is defined by your circumstances. If you already understand business and financial statements you may find stocks easier while someone may express a preference for technical analysis through charting that is prevalent in stocks. The real question is what is better for you?