To receive new articles instantly Subscribe to updates.
Is Forex Trading Riskier Than Stocks?
Nowadays all the traders can take advantage of an increasing abundance of assets to trade on, from big-league shares and the fast-moving futures to the Forex market. Picking which of these markets to trade may be difficult and numerous aspects must be taken into account to choose wisely.
The most significant factor is the trader's risk threshold and trading manner. For instance, buy-and-hold traders are usually more fit to joining the stock market, while intraday investors– may fancy markets wherein price volatility is more asserted.
Before entering into trading, you need to be clearly aware of all the advantages and risks in the financial market. Although the Forex and stock markets are very attractive on the one hand, they are also very risky on the other. Only when you understand the specifics and the basics of each, then you can get started.
Needless to say that Forex trading, as well as the stocks, not only involves risk in various forms, but it also presents a worthy function for many investors. Before answering the question "Which one is riskier, Forex or Stocks?" let us quickly go through the main features and differences of these markets.
Most financial advisors say it's not a matter of experience level so much as character and goals that determine whether you should invest in Forex or stocks. Absolutely, if you are more likely to "invest and forget" – i.e., investing funds approaching retirement – and are interested in continuous, long-term increase, then stocks are a better option. Nonetheless, if you want a more dynamic, hands-on trading practice and experience the thrill of a fast-moving trading market, then Forex may be the best fit for you.
Remember this - heading into any venture without preparing and training, but with lots of greed for easy money will always be risky.
Forex vs Stocks Trading
The Forex market attracts a whole lot of traders due to its high liquidity, possibility to trade around-the-clock and the level of leverage that is provided to participants.
Stocks, on the other hand, are the shares from nationally recognized and financially solid businesses. These stocks are actually able to run effectively during challenging economic circumstances and are known to pay returns (dividends). Blue chips are commonly supposed to be less volatile than many other investments and are often used to give steady return potential to investors' portfolios.
The main differences are:
This is a model of short-term value moves. While some traders, especially short-term and intraday traders, count on volatility in order to benefit from sharp rate fluctuations in the market, other traders are more satisfied with less volatile and less risky ventures. Because of that, numerous short-term traders are drawn to the Forex market, while buy-and-hold investors may favor the confidence given by blue chips.
Yet one more aspect of choosing a trading asset is the time when one is available. Trading sessions for stocks are defined to exchange hours, usually from 9:30 A.M. to 4 pm Eastern Standard Time (EST), Monday through Friday with the exclusion of holidays. The Forex market, on the other hand, prevails running round-the-clock from 5 P.M. EST Sunday, through 5 P.M. EST Friday, opening in Sydney, then moving around the world to Tokyo, London, and New York. The adaptability to trade throughout U.S., Asian and European markets – with high liquidity practically any time of day – is an added tip to traders whose schedules would otherwise restrict their trading activity.
A second factor is leverage. Most brokers offer leverage up to 10, in terms of stocks. As for the Forex market, it gives considerably higher leverage of up to 500:1, and in parts of the world, even higher leverage is accessible. Is all this leverage a good thing? Not necessarily. While it unquestionably provides the trampoline to make equity with a surprisingly small capital – trading accounts can be opened with as small as $100 – leverage can just as quickly ruin a trading account.
What Are the Risk Factors for Forex Trading?
Despite all possible advantages, as well as on any financial market, Forex has its risks. We are not going to touch upon the topic of how to protect ourselves from pointless loss of money being led by legal scammers on Forex, but we are going to tell you about the risks, which directly concern trading. Among the main risks that every Forex trader should be aware of are as follows:
The leverage effect is also significant for the trader's equity. The essence of it lies in the fact that a large credit asset may be sharply lost as a result of market factors and the trader will be in a rather deplorable state. Hence, it is necessary to use the money management system.
Furthermore, it is worth considering the risk of a possible change in the interest rate, which is associated with possible losses, which may be caused by a change in the policy of central banks concerning the interest rates. The interest rates themselves have a significant impact on the dynamics of online Forex quotes. It is really difficult to take into account the dynamics of prices if, in addition to the change in the interest rate itself, there are various other factors. In fact, it is almost impossible to predict how all the factors will affect, as the share of influence of each of them remains unknown. In general, changes in interest rates by central banks are made without any warning, so the market, because of this suddenness, quite often reacts too much, and unreasonably. One should understand that an event of this kind can turn the price in the opposite direction. It should also be taken into account that this indicator can indirectly point to economic problems in the country.
In the Forex market, non-market risks are related to the fact that the functioning of the market itself may be interfered with by government agencies, legislative bodies, as well as central banks. Administrative barriers and taxation can be a manifestation of this. This practice is still widely used in some countries. Each trader should understand that and always be prepared to react quickly to such administrative restrictions.
Slippage and poor execution
Slippage and unsatisfactory execution occur when you place an order at a price that is higher than the current price you have observed quoted on your platform. Remember that slippage can be both positive and negative, as you can often open a position at a better price than specified. In many ways, slippage can be seen as a positive result of forex trading in an ECN environment; it is proof that you are operating in the pure market without any manipulation or interference.
Risks Associated With Stocks Trading
One of the most apparent risks of trading stocks is that the economy can go bad. After the market collapse in 2000 and the terrorists’ attacks in 2001, the economy declined tremendously. It took years to recover to levels close to pre-9/11 values, just to have the bottom fall out again in 2008-09.
For novice investors, the most suitable approach is often to hunker down and ride out these downturns. If you can boost your position in good reliable companies, these dips are often good times to do so. Foreign stocks can be a brilliant point when the domestic market is in the dumps if you do your preparation. Thanks to globalization, some U.S. businesses make a bulk of their profits abroad.
Inflation is a burden on everyone. It degrades the value and generates collapses. Although we think inflation is under our control, the medicine of higher interest rates may at some point be as serious as the query. With the extensive government financing to fund the incentive packages, it is just a question of time until inflation advantages.
Investors historically have gone to “hard assets” such as real estate and valuable metals, particularly gold, in times of inflation. It harms investors on fixed incomes the most since it consumes the value of their income.
Stocks are the best assurance against inflation because companies will alter prices according to the rate of inflation.
A global collapse may mean stocks will strive for a sustained period of time before the economy is sound enough to stand higher rates. It is not a flawless solution of course, but that is why even withdrew investors should keep some of their assets in shares.
Market Value Risk
This one relates to what occurs when the market turns against or neglects your investment. It arises when the market runs off hunting the “next hot thing” and drops many good, but not exciting businesses behind. It also happens when the market drops - good shares, as well as bad ones, suffer as investors run out of the market.
Some investors find this a good thing and consider it as an occasion to load up on great shares at a time when the market isn’t charging down the rate. On the other hand, it doesn’t promote your object to view your investment flat-line month after month while other parts of the market are going up.
Don’t get captured with all your expenses in one field of the economy. By separating your investments across several sectors, you have better odds of competing in the growth of some of your stocks at any one time.
Being Too Conservative
There is nothing wrong with being a conservative or cautious investor. Nevertheless, if you never take any risk, it may be complicated to reach your financial goals.
The Forex and stock markets are a risky business for those who know nothing about it.
On a superficial level, trading Forex is always going to seem like the ‘riskier’ option. In that, it depends upon taking short term decisions and trying to benefit from fast and often quite tiny moves in the relative strength of various currency pairs.
Trading stocks, on the other hand, requires taking a longer-term look at the confidence and value of a particular company or load of companies.
Comparing the two isn’t merely a matter of comparing the risk factors implicit in each. It is about measuring up the pros and cons of the two separate types of trading. Plus, picking which kind of risk is more suited to your trading method and your objectives.
No matter the type of trading you eventually follow. The best tip is to do your study before putting any of your actual capital on the line.
Deciding base on ‘risk’ applied to different types of trading? That is far more difficult than simply stating one is riskier than others.
The risk which any particular trader is standing will depend upon the trading approach they choose.