Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets, CFDs, OTC options or any of our other products work and whether you can afford to take the high risk of losing your money.
The forex market and the stock market are two of the most popular financial markets to trade worldwide, in part due to high trading volumes and the potential volatility.
Trading stocks and forex are popular with different types of traders, and what you choose to trade may depend on a combination of factors, including your trading approach and goals, and your experience level. This article explores the similarities and differences between trading on forex versus stocks.
Enjoy tight spreads, no hidden fees and access to 12,000 instruments.
The foreign exchange market is the largest and most liquid financial market in the world, with a seemingly endless amount of major, minor and exotic currency pairs to trade. Forex traders monitor price movements in pips to determine a currency pair's movement. Major currency pairs include EUR/USD, GBP/USD and USD/JPY.
Stock markets, or stock indices, allows traders to speculate on the value of a huge range of global shares, form heavyweight blue-chip stocks to much lower value penny stocks. Some of the most popular shares to trade are well-established companies with a large market capitalisation, including US tech giants such as Amazon, Apple, Microsoft, Nvidia and Tesla.
Trading hours differ between the forex and stock market. The forex market is open 24 hours a day, five days a week, thanks to the overlap between time zones. Forex trading actually opens on Sunday evening, and runs through to Friday evening. On the other hand, there is a set daily timetable for the main stock market trading session hours, depending on the region and exchange.
For example, the London Stock Exchange (LSE) is open between 8am and 4.30pm, while US exchanges are open from 2.30pm to 9pm (UK time). Certain exchanges also close for a lunch break, in particular, within the Asia-Pacific region. At CMC Markets, we also offer the ability to spread bet or trade CFDs on over 80 US shares in extended hours, both before and after the main US trading session. This means that you can speculate on the 'magnificent seven' stocks of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, in the pre-market session from 9am, right through to the close of the post-market session at 1am the following day, Monday to Thursday, and from 9am to 10pm on Friday (all UK times). Overall however, forex trading hours offer more trading hours and therefore greater flexibility compared with trading on individual shares.
A particular appeal of forex trading is the volume of assets available to trade, with a daily volume of around $5bn. We offer the ability to spread bet and trade CFDs on more than 300 currency pairs, including major, minor and exotic forex pairs. Forex traders tend to lean towards the major currencies, such as EUR/USD and GBP/USD.
You can also trade on thousands of global shares with us, across a huge range of industry sectors from more than 20 countries. These stocks are traded on some of the world's major indices, which include the Dow Jones and S&P 500.
Another method of trading stocks is through Exchange-traded funds. ETFs are investment funds that hold a collection of underlying assets, and work in a similar way to share trading. Trading via an ETF offers more diversty and therefore less risk when compared with trading on one individual stock.
A popular topic for the forex versus stocks debate refers to market volatility. This measures price fluctuations within the markets that can either help traders to gain profits if the trade is executed effectively, or losses if the trade is not successful. Forex traders in particular often look for high liquidity within the market, as this means that an asset can be bought and sold rapidly without having much of an effect on its price. Therefore, it is likely that high market volatility is more beneficial for short-term traders. Many forex strategies work to open and close positions in a short period of time, with the intention of making a profit from small price movements when the market is particularly volatile. This way, they can enter and exit trades with quick precision.
In contrast, longer-term traders tend to prefer a buy-and-hold method, and may be less comfortable in a volatile environment. Given that certain blue-chip stocks are known for their stability within the stock market, traders are more likely to open 'buy' positions, hoping to profit over a slightly longer timeframe. As these traders are not looking for immediate short-term price fluctuations, a volatile market may not work as effectively for their trading strategy. Learn more about volatility trading.
Leverage in trading is definitely something to consider when weighing up the forex market against the stock market, also known as margin trading. Opening a spread betting or CFD trading account allows traders to place a small percentage of the full trade value, which is known as a deposit. This allows traders better exposure for trading both stocks and forex, as they have the opportunity to magnify their profits. This can, however, also result in the opposite direction of magnified losses.
In general, the forex market offers much lower margin rates, starting at around 3.3% or a leverage equivalent of 20:1. On the other hand, the stock market presents fewer risks of capital loss by offering margin rates from 20% or a leverage ratio of 5:1. Indeed, this should prevent traders from greater losses if their trades are unsuccessful. However, forex traders with more experience of volatile markets and closing quick positions may thrive off this higher leverage ratio, as the payout will be worth the risk if successful.
Another major difference between forex and stocks is the wealth of resources and strategies that have been created for traders of the forex market. As discussed already, many forex trading strategies aim to make a profit in the short term, such as day trading, swing trading and scalping. In particular, intraday trading can be applied to other markets, including the stock market, along with swing trading stocks. However, focused strategies for stock trading are generally less common, due to the fact that stocks are often traded through long-term positions, and currency pairs are instead appreciated more by short-term traders in volatile markets. The abundance of resources and tips on how to succeed in the forex market perhaps adds to the advantage of forex trading over stocks.
Taking into consideration all above points, there is no simple conclusion for which market is more profitable. Choosing a financial instrument or market to trade should take into consideration all external factors, such as personality type, risk tolerance and overall trading goals.
If your goal is to make small, frequent profits from price movements using short-term strategies, then yes, forex is more profitable than stocks. The forex market is far more volatile than the stock market, where profits can come easily to an experienced and focused trader. However, forex also comes with a much higher level of leverage and less traders tend to focus less on risk management, making it a riskier investment that could have adverse effects.
If your goal is to take a buy-and-hold approach for positions in the long-term, then the stock market is a safer and regulated option that can result profits in even larger profits over a period of time, if that stock is successful. You can make money trading both stocks and forex, using different strategies and practising a level of patience.
It is common practise for traders to look for correlation between financial markets, in order to predict future price movements. In particular, the forex and stock markets have been known to correlate for various stock market indices and subsequent exchange rates.
For example, before the global recession of 2008 began, investors noticed a trend between the Nikkei stock index and the USD/JPY currency pair. As the Nikkei declined, investors would take this as a sign of weakness for the Japanese economy, and in turn, the USD would strengthen against the JPY. This is known as an inverse correlation. If the roles are reversed and the value of the Nikkei strengthens, the yen in turn strengthens against the USD.
Many traders can use currency correlations to predict future market movements when opening positions within both markets. Although there are significant differences between forex and stocks, they often work well together when analysing technical trading patterns. However, market predictions are not guaranteed and given the particular volatility of the forex market, correlations of stock vs forex can suddenly change with no indication of which direction the markets are heading.
In conclusion, forex trading vs stock trading has remained a persistent and popular debate between traders of all levels of experience. If you have decided which asset you would like to trade, or would like to open positons within both markets simultaneously, follow the below steps.
*Leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only considered appropriate for experienced traders.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
See why serious traders choose CMC
Get tight spreads, no hidden fees, access to 12,000 instruments and more.
Includes free demo account
