The fundamental difference between Forex and Stocks trading, especially for the novice trader, is that the margin requirement is much smaller in Forex than it is in Stocks trading. Read more about significant trading differences here.
Forex traders can open positions with as little as $1 per 1 lot of the standard 100k units, while Stocks traders typically start with at least $5 per unit (or equivalent). Anything lower than this will cause a meagre capital adequacy ratio (“trading without interest”). It could be dangerous to your wealth; because if you cannot afford to lose your money, you should not speculate about it.
About Forex traders
Muslim Forex traders usually deposit funds into their brokerage account using a wire transfer or credit card. Foreign currencies must be purchased with dollars, however.
Forex traders can speculate on any liquid trading pair of currencies (see our previous article “Trading Currencies: What is a Liquid Currency”). For this reason, Forex has taken the name “the world’s most liquid and accessible market”. It means that you will never find bid/ask spreads as wide as those in stocks – even for very exotic instruments such as South African rand or New Zealand dollar pairs. Instead of investing in one specific company like most Stocks investors do, Forex traders buy and sell currency contracts (known as pips) using either the USD (US dollar) or their home country’s base currency (such as the Singapore dollar).
The significant difference between Stocks and Forex trading is that Stocks traders invest in companies (whether it’s through buying common stock or preferred stock). When the company earns money, the investor reaps benefits by either receiving dividends or exercising their rights as shareholders to elect board members who will then manage the company.
The difference between Stocks and Forex
Forex traders do not purchase shares of companies like Stocks investors do. They trade currencies instead. They traded currencies in pairs, with one currency being sold for another. When you buy a currency pair, you purchase one unit of this currency with another unit of some different currency. Because we trade Forex in pairs, i.e., USD/CHF (US dollar vs Swiss franc), all forex transactions involve two currencies rather than just one.
The other significant difference between Stocks and Forex trading is that Forex traders speculate on the short-term price movement of currencies rather than investing for the long term. Stocks are typically purchased intending to hold them until they appreciate (for dividend reinvestment plan or “DRIPs”) or until company profits payout dividends high enough to recoup your original investment (we know this as dividend yield).
Pros and cons
Forex traders can place trades through many platforms, including mobile devices. They also have access to advanced technical tools such as Fibonacci retirement levels or Bollinger bands, which give them an advantage over Stocks traders who must either go into a brick-and-mortar store or wait until the weekend to check out the following financial report.
With over $5 trillion exchanged daily, Forex is by far the most liquid market globally. I have done more than half of all stock trading outside of the US. Hence, if you want to do Stocks trading, you will need an account with a broker that can facilitate this (i.e., Interactive Brokers).
With Forex, it’s not only effortless to open an account, but there are many accounts available that provide very low minimum deposit requirements ($5 per lot) and allow for leverage beyond 200:1 (which means you can control $100k with just $2k in your account; keep in mind, though, that leverage is a double-edged sword).
If you lack trading experience or a small capital base, then Forex might be the better option. It is because it takes longer to learn how to trade stocks properly (and there’s no guarantee that you will even end up making money or recovering your original investment). In contrast, Forex requires little to no previous knowledge of markets and technical analysis. Yet this ease of entry also means that most traders lose money when they first start in Forex, whereas in many amateur stocks, traders still make a nice profit right off the bat.