This article was last updated on January 12, 2022
A debate that’s been going on for quite some time now is “Forex vs Stocks”, which one is more profitable and more importantly, why? However, that is too general of a question since there is a lot of depth to both markets. It shouldn’t come as a surprise that neither is better than the other per se; it just depends on your preference.
First and foremost, the main difference between both markets is what is being traded. In the case of the forex market (or Foreign Exchange), you will be converting one currency into another, making a profit on the difference.
On the other hand, we have the stock market (or the bourse), where people are buying and selling partial ownership of a company. Since the stock market is used more for long-term investments, it also sees lower daily volume than the forex market.
Choosing your market will depend on your goals and how you’d like to achieve them. Are you looking for short-term profits or prefer investing money for the long-term gains. Once you have an answer to this question, things become much easier. However, there are other ways to decide on a market.
Many factors should be considered when choosing the more compatible market for yourself. Such factors include regulations, volatility, short-term & long-term investing, and working hours. Others are more personal, like your trading strategies & goals, budget, location, risk tolerance, and more. So without further ado, let’s explore both markets.
What Is The Forex Market
The Foreign Exchange market, or forex market, is the world’s biggest financial market which saw a daily volume of more than $6 trillion back in 2019. This is where people buy and sell currencies in a high liquidity setting for short-term profits. Every coin is paired with another because they are sold in correlation. Simply put, how much of one currency do you need to purchase another, and how much of one currency will you get when selling another.
For example, we will take the most popular pair, the EUR to USD. If €1 is equivalent to $1.13, you will need $1.13 to buy €1, and if you want to buy $1, you will need €0.88.
Of course, these rates are not permanent and constantly change, depending on the global demand for each currency. These rates can depend on factors such as interest rates, inflation, exchange rates, economic condition, political stability, and many more.
Understanding each market allows us to realize that “profitable” becomes subjective in the forex vs stocks debate.
How Currencies Are Traded On The Forex Market
As you might already know, all currencies come with a three-letter “code”, i.e., USD, EUR, GBP, etc. There are more than 180 currencies available for trading at the Forex Market. However, the U.S dollar is part of most trading pairs. The following pairs are the ones that are seeing the most volume, accounting for more than 70% of all trades:
- EUR/USD (Euro/ U.S dollar)
- USD/JPY (U.S dollar/ Japanese yen)
- GBP/USD (British pound/ U.S dollar)
- AUD/USD (Australian dollar/ U.S dollar)
- USD/CAD (U.S dollar/ Canadian dollar)
- USD/CNY (U.S dollar/ Chinese yuan renminbi)
- USD/CHF (U.S dollar/ Swiss franc)
Buying and selling happen based on the prediction of whether a currency’s price will be losing or gaining value. As mentioned earlier, this volatility will depend on several factors since no one entity is responsible for a currency’s price.
It is not unusual to see traders using leverage while aiming for profits, quite the opposite. Nearly every experienced trader benefits from the leverage. That means that not all of their assets for trading are owned by them. This happens by providing the amount upfront to a broker, who can usually offer leverage of up to 1:30 or even 1:50 on rare occasions.
Traders with lower budgets will significantly benefit from this, due to the positions they can open and the profits they can reap. Of course, the risks of using margin are not to be taken lightly, although they are significantly lower when compared to leverage on other markets. This is mainly because currencies like the U.S dollar and Euro are highly unlikely to experience a dramatic dip.
Through all of this, we can conclude that the forex market is suitable for short-term investors, such as day traders, swing traders, and scalp traders.
The forex market works 24 hours every weekday, until Friday afternoon, and opens back again on Sunday, the same time. To be more specific, most brokers work from 5:00 p.m. on Sunday until 5:00 p.m on Friday. However, customer support is usually available 24/7, which obviously includes the weekends. Of course, each region’s market work hours vary due to time zones.
This means that there is a forex market opened at any given point in time (within the general working hours).
A market’s working hours can greatly influence trading due to how much time is required to watch the market. Of course, this can be seen as a plus by many who wish to trade as much as possible. Happily, this primarily includes short-term traders, which is why they chose the forex market.
Trading during the most active hours of the day is widely considered the best timing. This is because the volatility is highest, which enables higher gains. You can find the highest activity when two markets overlap in business hours.
If you are looking for constant trading availability, the forex vs stocks debate leans towards the idea that the forex market is more profitable.
Liquidity is how hard or how easy it will be to sell an “asset” (in this case currencies), on the market. For example, if you are trading an asset that everyone wants, the liquidity will be high. But if you are trying to sell an asset nobody wants, the liquidity will be low.
Forex is a market with quite high liquidity, mostly due to the daily volume that often reaches trillions of dollars. Of course, the liquidity is not constant, as during the more “stagnant” hours of the market it drops. However, the opposite is also true, as, during the more active hours, the liquidity is extremely high.
There is also one more factor that will decide the liquidity experienced during trading. And that would be the pairs you choose to trade. The more popular the currencies involved, the higher the liquidity.
Two main types of fees come with trading in the forex market. These are Fixed Fees and Relative Fees:
- Fixed Fee – This is a predetermined fee that never changes it price, no matter how much you trade. They are applied per transaction. For example, it could be $1 per transaction, so if you were to make 100 transactions, the accumulated fees will sum up to $100.
- Relative Fee – In this case, the comission is calculated depending on the value of the trade. For example, a $10 trade might have $0.1 fee, but a $10 000 will have a $100 fee.
Of course, brokers also apply additional fees to their users’ trades. Some of these include overnight fees, inactivity fees, conversion fees, and more. Due to possible hidden costs, it is imperative to get familiar with the broker’s commissions you choose.
Final Thoughts On The Forex Market
Just like any other market, the forex market is also profitable. However, it should be noted that more traders lose than gain. This happens when people are excited about getting into the “art of trading” without being competent enough. There is nothing wrong with being passionate, but it is important to have the right tools before you enter the financial market. Such instruments are learning the fundamentals, knowing your budget, having a strategy, risk management, etc.
If you are interested in short-term profits, then the forex market is definitely the better market of the two for you. It is open 24 hours every weekday, which means you will be getting to trade more than you would at regular financial markets. High liquidity is also a factor many look at as an advantage.
And finally, don’t forget to make sure the broker you choose is legit. You can find more information about that in our “Is Forex Legit?” article to avoid any fraudulent brokers looking to scam you.
So, in the discussion of “Forex Vs Stocks Which Is More Profitable And Why”, we have to also see the other side of the coin: the stock market.
What Is The Stock Market
The stock market is arguably the most popular financial market, where different investors and traders buy, sell, and issue shares of publicly traded companies. These stocks represent partial ownership of such a company. Every time you buy a stock, you purchase a tiny piece of a business.
The stock market is more secure and regulated than the forex market.
Statistics show that the average daily volume of the stock market is usually around $300 billion and can reach $500 billion on a good day. Compared to the forex market, this is just a fraction of the averaging trillions it sees. However, there is a good reason for this.
People are attracted to the stock market due to its stability (although not always) and predictability. This ensures they can keep their assets for longer periods of time, reaping out benefits such as dividends and growing prices.
There are many factors that can affect a stock’s price. For example, this can even include Elon Musk tweeting how Tesla will once again accept Bitcoin as a payment method. In such a situation, the price of a Tesla stock will go up within minutes. However, many other factors include the default supply & demand, future visions, quarterly results, competitors, news, accidents, and other similar aspects.
How Are Stocks Traded & How To Choose The Right Ones To Invest It
Nowadays, traders and investors mainly use online exchanges to buy and sell shares on the stock market. However, there are also physical locations such as “trading floors” where transactions ha pen or physical brokerages. Of course, before buying and selling, one will need a brokerage account, otherwise, trading is not possible.
In contrast with how the forex market works, you will need to do research on companies before investing for better results. This includes what their main goal is, what solution they offer, whether their product will be demanded in the future, etc.
Additionally, the multi-billionaire and right hand of Warren Buffet, Charlie Munger, said, “Good businesses are ethical businesses. A business model that relies on trickery is doomed to fail.”. As a side note, we have an article “101 Charlie Munger Quotes To Better Yourself Financially”, which includes many similar sayings, quite useful for investors and traders.
Also, you will have to decide whether you want to invest in the long-term or wish to day-trade for short-term pro its. It should come as no surprise that the forex market is by far the better performer when it comes to short-term trading. However, the security the stock market provides is an attraction to many. On top of that, how profitable each market is will depend on the timeframe you are looking at, so forex vs stocks definitely becomes a long discussion.
The stock market has different working hours for the various exchanges. This is similar to how the forex market works, but in this case, different stock exchange markets trade different company shares and have different working hours.
In the case of the most popular markets, the New York Stock Exchange (NYSE) and the Nasdaq, they operate from 9:30 a.m to 4:00 p.m EST/EDT. On the other hand, we have the Euronext, or the European stock market, which operates from 9:00 a.m to 5:30 p.m.
The Chinese stock markets – Shanghai and Shenzhen Stock Exchange operate from 9:00 a.m to 3:00 p.m. And the Indian stock markets Bombay and National Stock Exchange have a working time of 9:15 a.m to 3:30 p.m.
During national holidays the stock market doesn’t work, so make sure to check out a holiday calendar and get familiar.
Working hours highly impact trading due to “after-hours trading”. This happens when you buy or sell shares outside of normal trading hours, typically between 4 p.m and 8 p.m. It is advantageous for many people to trade this way, especially those who work during the day but still wish to invest or trade.
Statistically speaking, the stock market has rather mild liquidity. However, this will highly depend on which stocks we are talking about. There are stocks with higher daily trade volume and lower daily trade volume. When comparing the two, the former will have higher liquidity, whereas the latter will have lower liquidity.
This is important because if the liquidity is low, from the time you place a request to sell your share until it is actually bought, the share might drop in value. More importantly, if you sell more than one share and the price drops while it’s liquidating, the effect will be bigger.
In the stock market world, liquidity has an additional meaning. A stock is considered liquid if buying and selling shares rapidly has an insignificant impact on its price.
If you want to buy or sell a stock, you will have to pay a fee/commission to your broker for the transaction. Interestingly enough, there are three main types of fees in the stock market. These are the fixed fees, relative fees, and a combination of the two. Earlier, we mentioned fixed fees and relative fees, but what is the combination of the two?
The combination would be when the broker applies a flat fee of, let’s say, $5 for every share you buy or sell but also places a fee of 1%. In this case, to buy a share worth $100, you will need to pay $106.
Additional expenses could be advisor fees, management fees, inactivity-of-account fees, annual maintenance fees, and more.
It is crucial to remember that each firm presents different fees and commissions, so it is a good idea to do your research.
Final Thoughts On The Stock Market
The stock market is a great place for those who wish to invest in a company in the long term. It was not as easy to start buying and selling shares in the past, but nowadays, it is as easy as it can get. Online trading is accessible to everyone, regardless of status, budget, knowledge, etc. Of course, due to the nature of the stock market, it is a good idea to have a greater budget than what you’d otherwise need for the forex market.
It should also be noted that the annual returns are also not as great as some other markets’. However, the stock market is way more secure and less volatile, meaning less risk.
If you wonder whether the stock market is a good place for short-term profits, i.e., day, swing, and scalp trading, the short answer is yes. However, the forex market is where you will see better profits in the short term, although it could also be riskier.
Comparison: Forex Vs Stocks
Daily Volume – Due to the nature of the forex market, it sees considerably more volume than the stock market. The tendency is that people who trade on the forex market are looking for short-term gains, while it is the opposite for the stock market. This amounts to more transactions on the forex market.
Working Hours – The forex market essentially operates 24 hours a day during the week. On the other hand, each stock market’s working hours are different. In the case of the NYSE runs from 9:30 a.m to 4 p.m, Monday through Friday.
Budget – It is easier to get into the forex market in terms of the capital needed, because of leverage, even with a small starting sum. The stock market could be difficult if you have a lower budget due to the price of stocks.
Liquidity – In current days, both markets have considerable liquidity. Of course, it is not a constant, so it changes depending on what currencies or stocks you are trading. The liquidity will be lower due to the supply-demand ratio if you aim for fewer traded pairs or stocks.
Trading Fees – This will highly depend on the brokerage you choose. The fees can be fixed, relative, or a combination. Usually, stock market brokers require a higher cost per transaction than forex market brokers.
Learning Curve – Trading currencies is significantly more complex than trading stocks. You will need many tools for the forex market due to the higher volatility. On the other hand, the stock market is considerably more accessible, although it requires a certain level of competency and knowledge.
Risk – Currency traders experience higher risk than stock market traders due to the aim of short-term gains.
This further proves there is no definitive answer to the “Forex Vs Stocks Which Is More Profitable & Why” discussion.
Forex Vs Stocks Which Is More Profitable And Why and How To Choose The Market More Suitable For You?
This is definitely a question many have when first starting out. It is natural for us to look for a clear answer in the Forex vs Stocks debate. Mostly, that happens when it comes to which is more profitable of the two. Of course, everyone wants maximum gains; however, you should also consider all aspects of each market.
It is inarguable that you can see substantial profits in both markets. If you have still not come to a conclusion, we will further clear things out.
The forex market is suitable for those with a lower budget, want short-term gains, tolerate higher risk, and are comfortable using leverage.
You can also use the stock market for short-term gains, but the profits will be less while the risks remain high. However, this will be a suitable market for those with a more significant budget and looking for mid to long-term investments, lower risk, and a highly regulated market.
Of course, there are many more reasons why you might want to trade currencies or stocks. Although, these are general directions to give you an idea of each.
So, choosing the more profitable of forex vs stocks obviously comes down more to suitability and your preferences t an anything else.
It is important to have personal goals and boundaries before choosing between forex vs stocks. Both are profitable if you know what you are doing. It will depend more on your idea of what profitable is. Are you looking for short-term or long-term results?
Do you want to be trading more frequently, or want to invest and come back later? Of course, both markets carry their pros & cons. Realizing exactly what each market offers is essential to deciding which will be more suitable for you. Understanding all of this will give you an idea of which will be more profitable – forex vs stocks.
It is also a great idea to further explore the market that you think is opportunely for you. This will give you a better idea of what to expect when you start trading. It doesn’t hurt to repeat that you have to learn the foundation of the forex or stock markets before investing. Being prepared is what sets profitable traders apart from the rest.
The debate of forex vs stocks will always be intriguing, even if “which is more profitable” gets brought up first. This sparks the interest of many and brings new players in. The growth of the market naturally translates into more opportunities for all traders. More opportunities mean it is never too late to start trading, so worry not about that.
At the end of the day, if you don’t enjoy trading currencies, you can always switch gears and start trading stocks and vice-versa.