Forex trading vs. stock trading: which should investment beginners choose?

stock trading software
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Investing is the smart way to have your money make money for you. While there is no guarantee, an average return of 8-10% is not uncommon for a decent investment, putting the returns on offer from traditional savings accounts firmly in the shade. 

Two main paths to investment are widely available. The most popular, and the one that most people understand, is stock investing. From the comfort of your own home, the best online stock trading platforms now allow you to buy a small share of a company in a matter of seconds. If the company does well, the price of the stock increases, while some will pay dividends to investors when their performance excels. 

The second option is forex trading - forex is an abbreviation of foreign exchange, with the trading element referring to international currencies. Anyone who has traveled abroad has likely dabbled in forex trading unwittingly, when exchanging their dollars for the local currency. The difference with proper forex trading is usually scale, with the exchanging of currencies made possible by the best forex brokers offering traders the potential to make significant profits amid fluctuating currency values. 

Forex trading vs. stock trading: which should investment beginners choose?

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The forex market generally revolves around eight major currency pairs involving the euro, the U.S. dollar, the yen, the British pound, the Australian dollar, the Swiss franc, the Canadian dollar, the Australian/New Zealand dollar and the South African rand. 

Each method comes with its own advantages and disadvantages, but which is likely to be best for you? 

Stock trading considerations

Stocks are steadier
Even in low times, a strong company can keep its value or bounce back from adversity. Therefore, stocks are a better investment for those looking at the long term and who value stability over a chance at quick high returns with the equally high risk of losses.

It's easier to find an investment fund for stocks
If you're not interested in paying a lot of attention to the market, you can invest in stocks through mutual funds or retirement accounts. IRAs come with tax advantages you cannot get with forex trading. For many people, however, the advantage to investing in stocks over forex is that once you find a broker or investment firm you feel confident with, you can leave the day-to day investing decisions to them.

You don't have to react as quickly
Currency rises and falls in relative value quickly; in order to make money off money, you need to act quickly. Stocks, by comparison, tend to have more gradual trends you can track over time.

Forex trading vs. stock trading: which should investment beginners choose?

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Stocks can pay dividends
Depending on the company and type of stock, you may receive dividends as often as quarterly. Forex trading does not offer this.

Stock trading is limited to exchange hours
On the downside, you can only trade stock when that particular exchange is open – the NYSE, for example, is open 9:30 a.m. to 4 p.m. Eastern Time. If you want to trade on your own but have a day job, you might not be able to schedule time to make trades.

Forex trading features

You can trade 24/7
The forex market is not tied to a geographic area, so even when one stock exchange closes, another is opening. This gives you round-the-clock opportunities for trading. However, not all trading times are ideal. Just because the market is open does not mean it's active. In order to make money, you need to trade on an active market. The best trading times happen when the markets that relate to the currency you are trading overlap.

It's a volatile market
If you want a fast, exciting trading pace, forex trading is for you. Forex completes more trades every day than the New York Stock Exchange (NYSE), which means ample opportunities for those who prefer short-term investments with quick turnarounds.

Forex trading costs are minimal
Most forex brokers are compensated through the bid/ask spread, and, unlike stock brokerages, they do not charge extra commissions or transaction fees.

Forex influences
Rather than focusing on a specific company and how its performance affects its stock, with forex you must pay attention to the nation of the currency you are trading in, and beyond – everything from a natural disaster to an election can affect the value of currency. To trade smart, you need to keep up with world events, making it ideal for people who enjoy staying abreast with events around the world.

Forex trading vs. stock trading: which should investment beginners choose?

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You'll need a margin account
Trading on margin allows you to use leverage to get more for your dollar. With a margin account, you borrow money from your broker in exchange for keeping a small sum in your account (the minimum required margin) in order to increase your potential return on an investment. Leverage is typically expressed as a ratio, such as 50:1, 100:1, 200:1. For you, the investor, it means that for every dollar in your account, you can place a trade for $50 of the currency pair you're interested in. This means that you’ll get more in returns on the trades you win, but losses can be large for the trades you lose. Because of this, many forex traders make frequent use of stop-loss orders.

Forex trading is restricted in the US
The US does not allow brokers for US citizens to trade forex with a leverage higher than 50:1. Forex companies cater to citizens of many nations and some forex companies offer leverages as high as 500:1. Therefore, unless you have dual citizenship, you need to double check that your brokerage that can legally trade on behalf of US citizens.

Which is best for novice investors?

Most financial advisors say it's not so much a matter of skill level, but more your personality and goals that determines whether you should invest in forex or stocks. Certainly, if you are more inclined to "invest and forget" – i.e., investing money toward retirement – and are interested in gradual, long-term growth, then stocks are a better choice. However, if you crave a more active, hands-on trading experience and enjoy the excitement of a fast-moving trading market, forex may be the best fit for you.

Importantly, always remember that any type of investing - whether through the best online stock trading platform or a forex broker - is never risk free. The opportunities for excellent returns make investment a sensible option if you have the knowledge yourself or seek the advice of a professional, but there are no guarantees that your money will grow. Indeed, the vagaries of the markets - both for stocks and currencies - means you could easily lose money too. The figures suggest investors should win out in the end, assuming they leave their funds long enough to ride out any short-term ups and downs, but there are no assurances it won't be a bumpy ride, and can be no promises of what you will gain. 

Tim Leonard

With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.