Stocks vs Forex

For myself now days I trade stocks for long term investments and forex for shorter term. It is funny because in my younger days I day traded stocks like there was no tomorrow. I remember one day my father asked me if I can make him a nice return with $20,000. Guess what? I doubled it in a year then lost almost all of it a year later. After graduating College I moved to LA and worked for a 65 year old self-made multimillionaire daytrader right out of his hooked up garage in Calabasas California. Anyway that is another story.

Here are nine main differences between Stocks and Forex:

1.       Selection: There are literally thousands of stocks to trade. With Forex you only have a hand full of currency pairs to trade. In fact, many traders only trade one Forex pair day in and day out (ex. Eur/usd).  This narrows down the focus and allows traders to zone in on their niche.

2.       Trading Hours: Stock markets have an open and close time each day. For instance the U.S. Stock markets are open from 9:30AM EST to 4:00PM ET Monday through Friday (you can trade premarket and after hours but liquidity is limited). The Forex market is open 24 hours a day from Sunday 5PM ET to Friday 5PM ET (give or take an hour depending on your broker).  You can trade in the morning, afternoon, evening, or even midnight in the Forex market.  This allows flexibility for all kinds of traders.

3.       Leverage: With a stock margin account you can get 2:1 leverage. In Forex, you can expect at 50:1 up to 400:1 leverage. Note: Leverage is a double edged sword. The high degree of leverage can work against you as well as for you. However, many folks misinterpret how leverage actually works.

4.       Margin interest: If you short a stock (short sale), your broker will charge interests on that position daily. In Forex, you can short all you want with no margin interest.

5.       Up-tick rule: Stocks have what is called an up-tick rule when you want to sell short. In order to get filled on a short sell position the price needs to tick up or you will not get filled (executed). This up-tick rule prevents short sellers from shorting a position when there is downward momentum.  However,  there exists no up-tick rule in Forex, so feel free to short away. 

6.       Market manipulation: Analysts, economist, brokerage firms, newsletters, message boards, even TV show host can influence a particular stock. How many times have you heard an upgrade or downgrade by a particular media guru only to watch it go the opposite way? Ever wonder if there may be another agenda on these stock calls? Do you think these guys can influence a $4 trillion dollar Forex market that is traded every day? Doubtful.

7.       Capital:   For a margin stock account you need at least $2,000 and can control up to $4,000 in equities with a 2:1 leverage. In Forex, you can open an account with as little as $250 and control up to $25,000. However, you need to be mindful that the high degree of leverage can work against you as well as for you.

8.       Day trading Rule: If you have a non-margined stock account (cash account), you are limited to  four day trades within a within five business days. Also with a non-margined stock account traders are not able to withdraw funds or purchase additional stock after you close a position due to a three-day clearing rule.   In Forex, there is no such rules, and thus are able to day trade and withdraw to your heart’s desire.

9.       Taxes: This pertains to US tax filers. When you day trade a stock or close it before one year it is considered short- term and your profits will be included into your ordinary  income. In Forex regardless if you trade short-term or long-term you have what is called a 60/40 rule. 60% is considered long term capital gains and the 40% will be included in your ordinary income. So depending on your tax bracket you can figure out how this relates to you. Please consult with your own tax advisor!