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`Investing in Forex vs. Stocks
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`STOCK TRADING
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` STOCK TRADING STRATEGY & EDUCATION
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`Investing in Forex vs. Stocks
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`By JEAN FOLGER | Updated Aug 19, 2020
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`TABLE OF CONTENTS
`Comparing Forex to Blue Chip Stocks
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`Comparing Forex to Indexes
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`Tax Treatment: Forex Vs. Equities
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`The Bottom Line
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`EXPAND +
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`Today's active investors and traders have access to a growing number of trading instruments,
`from tried-and-true blue chip stocks to the fast-paced futures and foreign exchange (or forex)
`markets. Deciding which of these markets to trade can be complicated, and many factors need
`to be considered in order to make the best choice.
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`The most important element may be the trader's or investor's risk tolerance and trading style.
`For example, buy-and-hold investors are often more suited to participating in the stock market,
`while short-term traders—including swing, day and scalp traders—may prefer forex whose price
`volatility is more pronounced.
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`Investing in Forex vs. Stocks
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`KEY TAKEAWAYS
`Deciding whether to invest in the foreign exchange markets (forex) or stocks/stock
`indexes depends on he trader's or investor's risk tolerance and trading style.
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`Specific elements to compare include volatility, leverage, and market trading hours.
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`Broadly speaking, the equities markets—blue chip stocks and index funds—suit a buy-
`and-hold investor, while active traders often prefer the fast-moving forex.
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`Comparing Forex to Blue Chip Stocks
`The foreign exchange market (aka forex) is the world's largest financial market, accounting for
`more than $6.6 trillion in average traded value each day in 2019, according to the most recent
`Bank for International Settlements. [1] Many traders are attracted to the forex market because of
`its high liquidity, around-the-clock trading and the amount of leverage that is afforded to
`participants.
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`Blue chips, on the other hand, are stocks of well-established and financially sound companies.
`These equities are generally able to operate profitably during challenging economic
`conditions and have a history of paying dividends. Blue chip stocks are generally considered to
`be less volatile than many other investments and are often used to provide steady growth
`potential to investors' portfolios.
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`Investing in Forex vs. Stocks
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`So what would be the key differences to consider when comparing a forex investment with one
`in blue chips?
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`Volatility. This is a measure of short-term price fluctuations. While some traders, particularly
`short-term and day traders, rely on volatility in order to profit from quick price swings in the
`market, other traders are more comfortable with less volatile and less risky investments. As
`such, many short-term traders are attracted to the forex markets, while buy-and-hold
`investors may prefer the stability offered by blue chips.
`Leverage. A second consideration is leverage. In the United States, investors generally have
`access to 2:1 leverage for stocks. The forex market offers a substantially higher leverage of up
`to 50:1, and in parts of the world even higher leverage is available. Is all this leverage a good
`thing? Not necessarily. While it certainly provides the springboard to build equity with a very
`small investment—forex accounts can be opened with as little as $100—leverage can just as
`easily destroy a trading account.
`Trading Hours. Yet another consideration in choosing a trading instrument is the time period
`that each is traded. Trading sessions for stocks are limited to exchange hours, generally 9:30
`A.M. to 4pm Eastern Standard Time (EST), Monday through Friday with the exception of
`market holidays. The forex market, on the other hand, remains active round-the-clock from
`5 P.M. EST Sunday, through 5 P.M. EST Friday, opening in Sydney, then traveling around the
`world to Tokyo, London and New York. The flexibility to trade during U.S., Asian and
`European markets—with good liquidity virtually any time of day—is an added bonus to
`traders whose schedules would otherwise limit their trading activity.
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`Should You Trade Forex Or Stocks?
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`Comparing Forex to Indexes
`Stock market indexes are a combination of stocks, with some sort of element—either
`fundamental or financial—which can be used as a benchmark for a particular sector or the
`broad market. In the U.S. financial markets, major indexes include the Dow Jones Industrial
`Average (DJIA), the Nasdaq Composite Index, the Standard & Poor's 500 Index (S&P 500), and
`the Russell 2000. The indexes provide traders and investors with an important method of
`gauging the movement of the overall market.
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`A range of products provide traders and investors broad market exposure through stock market
`indexes. Exchange-traded funds (ETFs) based on stock market indexes, such as the SPDR S&P
`500 ETF Trust (SPY) and the Invesco QQQ, which tracks the Nasdaq 100 Index, are widely traded.
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`Stock index futures and e-mini index futures are other popular instruments based on the
`underlying indexes. The e-minis boast strong liquidity and have become favorites among short-
`term traders because of favorable average daily price ranges. In addition, the contract size is
`much more affordable than the full-sized stock index futures contracts. The e-minis, including
`the e-mini S&P 500, the e-mini Nasdaq 100, the e-mini Russell 2000, and the mini-sized Dow
`Futures are traded around the clock on all-electronic, transparent networks.
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`So what would be the key differences to consider when comparing a forex investment with one
`that plays an index?
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`Volatility. The volatility and liquidity of the e-mini contracts are enjoyed by the many short-
`term traders who participate in stock market indexes. Let's say that the major equity index
`futures trade at an average daily notional value (the total value of a leveraged position’s
`assets) of $145 billion, exceeding the combined traded dollar volume of the underlying 500
`stocks. The average daily range in price movement of the e-mini contracts affords great
`opportunity for profiting from short-term market moves. While the average daily traded
`value pales in comparison to that of the forex markets, the e-minis provide many of the same
`perks that are available to forex traders, including reliable liquidity, daily average price
`movement quotes that are conducive to short-term profits, and trading outside of regular
`U.S. market hours.
`Leverage. Futures traders can use large amounts of leverage similar to that available to forex
`traders. With futures, the leverage is referred to as margin, a mandatory deposit that can be
`used by a broker to cover account losses. Minimum margin requirements are set by the
`exchanges where the contracts are traded, and can be as little as 5% of the contract's value.
`Brokers may choose to require higher margin amounts. Like forex, then, futures traders have
`the ability to trade in large position sizes with a small investment, creating the opportunity
`to enjoy huge gains—or suffer devastating losses.
`Trading hours. While trading does exist nearly around the clock for the electronically traded
`e-minis (trading ceases for about an hour a day to enable institutional investors to value
`their positions), the volume may be lower than the forex market, and liquidity during off-
`market hours could be a concern depending on the particular contract and time of day.
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`Tax Treatment: Forex Vs. Equities
`These various trading instruments are treated differently at tax time. Short-term gains on
`futures contracts, for example, may be eligible for lower tax rates than short-term gains on
`stocks [2] In addition active traders may be eligible to choose the mark to market (MTM) status
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`stocks. [
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`Investing in Forex vs. Stocks
`] In addition, active traders may be eligible to choose the mark-to-market (MTM) status
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`for IRS purposes, which allows deductions for trading-related expenses, such as platform fees
`or education. [3]
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`In order to claim MTM status, the IRS expects trading to be the individual's primary business. IRS
`Publication 550 covers the basic guidelines on how to properly qualify as a trader for tax
`purposes. [4] Traders and investors alike should seek the advice and expertise of a qualified
`accountant or other tax specialist to most favorably manage investment activities and related
`tax liabilities, especially since trading forex can make for a confusing time organizing your taxes.
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`The Bottom Line
`The internet and electronic trading have opened the doors to active traders and investors
`around the world to participate in a growing variety of markets. The decision to trade stocks,
`forex or futures contracts is often based on risk tolerance, account size, and convenience.
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`If an active trader is not available during regular market hours to enter, exit or properly manage
`trades, stocks are not the best option. However, if an investor's market strategy is to buy and
`hold for the long term, generating steady growth and earning dividends, stocks are a practical
`choice. The instrument(s) a trader or investor selects should be based on which is the best fit of
`strategies, goals, and risk tolerance.
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`ARTICLE SOURCES
`
`Related Articles
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`FINANCIAL FUTURES TRADING
`How Do S&P 500 Futures Work?
`
`FOREX TRADING STRATEGY & EDUCATION
`Currency Futures: An Introduction
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`Investing in Forex vs. Stocks
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`Investing in Forex vs. Stocks
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`Related Terms
`Cboe Volatility Index (VIX)
`The Cboe Volatility Index, or VIX, is an index created by Cboe Global Markets, which shows the market's
`expectation of 30-day volatility. more
`
`What Is a Death Cross?
`A death cross pattern is defined as that which occurs when a security's short-term moving average drops
`below its long-term moving average. more
`
`S&P 500 Mini Definition
`The E-mini S&P 500 is an electronically-traded futures contract representing one-fifth of the value of the
`standard S&P 500 futures contract. more
`
`How Index Futures Work
`Index futures are futures contracts where investors can buy or sell a financial index today to be settled at
`a date in the future. Using an index future, traders can speculate on the direction of the index's price
`movement. more
`
`Stock Trader
`A stock trader is an individual or other entity that engages in the buying and selling of stocks. more
`
`Financial Markets Definition
`Financial markets refer broadly to any marketplace where the trading of securities occurs, including the
`stock market and bond markets, among others. more
`
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