There are plenty of options available for you nowadays, if you are looking to invest your money. You can choose stocks, foreign exchange pairs, commodities, bonds, or other types of assets. This variety helps you choose the asset type that works best for you. Naturally, different people have different trading goals, perspectives on the market, and appetites for risk. Thus, what works best for you might not be suitable for someone else.
Oftentimes, forex brokers offer you the possibility to trade stock CFDs (which are contracts for differences on stocks) along with the ability to trade forex pairs. CFD Trading tends to be very similar to trading the actual underlying instruments, and it often requires a smaller amount of capital.
We’ll focus on the differences between stocks and foreign exchange pairs (aka forex), so you can make an informed decision about which suits your trading style best.
1Differences between Stocks and Forex Pairs
- Stocks are more suitable for a longer-term type of strategy. When you invest in stocks or stock CFDs it is generally wise to expect that your investments will take rather a long time to bear fruit. That is because stocks are shares in businesses, which generally do not turn a profit overnight. Forex pairs, on the other hand, are more volatile and move faster, which can be a double-edged sword. They can move quickly against you or with you.
- Forex pairs are riskier. Due to their more pronounced fluctuations, forex pairs tend to be more suitable for more aggressive traders who are willing to take on higher levels of risk.
- Stocks depend on the performance of businesses. When you invest in stocks or conduct stock CFD trading, then the performance of the instrument depends on the performance of the underlying company. Forex pairs on the other hand, are not investments in companies, but rather in central bank money.
- Stocks and forex require different types of analysis. If you want to buy a stock CFD for a specific company, you need to analyze the performance of that particular company and the factors that influence that performance. On the other hand, when you want to analyze a forex pair, you need to analyze the performance of the two economies in question at the macro level, which can be more demanding.
- Forex pairs have an overnight rate. When you buy or sell a currency pair, you might earn or pay an overnight rate that accrues at the end of the day if you are still holding the pair. Stock CFDs can have overnight charges as well. However, the rate and terms might be different between the two.
Forex pairs and stocks have different properties, and as a trader you need to take those differences into consideration when you develop your trading strategy. Generally, stocks are more suitable for long term investors whereas forex pairs are more suitable for traders who can tolerate high fluctuations. Either way, you can mix between both, and you need to manage risk well for your strategy to work as intended.