Determining whether forex is better than stocks, or stocks are better than forex, is difficult to define exactly. This is because while they have similarities, forex and stocks are actually very different.
Most importantly, in deciding whether to go for forex or stocks, the decision comes down to the person, and which is more profitable in their unique situation.
In general, when deciding between forex or the stock market, forex can be seen as the riskier option, but open to more short-term wins, whereas stocks are better for slower, long-term growth. This also depends on the specific investments made on either side.
What are stocks?
Stocks are an investment into a company. A stock in itself represents the ownership of a piece of that company’s assets and future earnings. When you buy a stock, you are buying a small piece of that company and can enjoy profits if the company (and in turn, your stock) becomes more valuable.
There is a difference between privately owned stocks and publicly traded stocks. Stocks that are publicly traded exist on an exchange, for example, the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automatic Quotation System – Nasdaq, as it is better known. This is when a company has made itself publicly available.
Privately owned stocks follow the same logic, however, are not part of an exchange, and therefore can be more volatile, considering that they are often for startups and companies that have not been listed. Each investment also must be approved by the issuing company. There are also cases where private stock is offered to employees in startups, and can often be used as compensation, if cash flow is insufficient to pay wages at the beginning.
What is forex?
Forex is a portmanteau of ‘foreign currency’ and ‘exchange’. As currencies around the world increase and decrease in value, there is profit to be made by buying one, waiting until it increases in value compared to another, and then exchanging it back, therefore making a profit. This is forex in a nutshell.
For a more detailed view of what forex is, read our article from Ken FX Freak, who gives a perfect introduction to how forex works.
Investing in stocks
If you are looking to buy and hold, making an investment for the long term, then the stock market is the better option. Investing in a blue chip stock, or an ETF (exchange-traded fund), is the safest option for traders, as they are stocks with low volatility. High volatility means the price will fluctuate heavily in a short period of time.
Blue chips are stocks that are very well established and financially sound; they will survive most crashes and have been reliable to investors for many years. These are the stocks which will generally be less volatile, and can provide steady growth over many years.
It is important to check stock prices over a long period of time compared to a short period of time. For example, take note of the BP share price fluctuation within one year compared to five years, as well as the Rolls Royce share price, Tesla stocks from one year compared to five years, as well as other big oil stocks. You will see that often the growth in the short term is negative, but is positive over a long period of time.
This is crucial with stocks – assessing the long-term growth, as opposed to the quick wins which may seem appealing. Stocks are ideal for a long-term investment, sometimes over several decades.
Investing in forex
Forex is less of an investment, more of a trading strategy. Therefore, the wins in forex are a lot more immediate, but can also be true of the losses.
Trade timing is very important for forex and it is important to figure out which forex session works best for you – the Asian session, the London session or the NY session.
Read our article ‘What are the best currency pairs to trade?’ for more information on this topic.
If you are still deciding on whether to trade forex or stocks, it is important to approach it from the angle of which works best for you personally, rather than what is objectively more successful.
Forex trading, while producing greater profits in the short term, is riskier overall compared to stocks. You will also need to devote more time to forex, as trading forex often requires daily attention, and learning currency pairs.
If you are looking for a place to store your money, and earn passive income, then the stock market may be your best option. This way you can buy stocks and earn dividends without needing to monitor or maintain your portfolio, or make any quick decisions.