I looked through the existing threads on forex vs stocks but did not find much useful information for my question so here’s a thread.
Whenever I speak with people they seem to have this perception that it is far more risky to trade the forex market than the stock market.
I’m curious why this is the case, is it because they’ve all heard stories of people who’ve gotten involved in a scam broker and lost money?
Perhaps it’s because there is easier access to high leverage so people blow up really quickly and dismiss it as gambling?
People say there is easier competition in stocks and the professionals are making forex hard for the amateur.
If someone feels this way I’d like them to please elaborate on how and why this can be the case.
So what are the reasons for this overwhelming perception?
If one is talking about the public in general then I think the reason is probably related to a perception of what is speculation and what is investment.
I doubt many of the general public consider taking positions in a currency other than one’s own to be an investment vehicle, rather it is a reckless, speculative gamble that will either “win” or “lose”.
On the other hand, I think most “laymen” consider stocks to be an investment in something that will almost definitely go up in value if one waits long enough. Its value might go up and down in the meantime but that is not perceived to be the same thing as a “gain” or “loss”, especially if the end result is a gain. I doubt many “public” investors actually bother to check their portfolio values very often.
But if one talks specifically to traders then maybe the difference is not so clear, if there is, in fact, a difference at all…
As Manxx mentions above, there’s the difference between “investing” and “trading” to be considered. Both forex and stocks can be dealt in as either trading or investing, but the reality is that more people dealing in forex are trading while more people dealing in stocks are investing, and since trading is seen as riskier than investing (and given the way so many people approach trading, that’s probably valid), that accounts for part of the perception.
However, comparing the two just on a [U]trading[/U] basis, I don’t believe that trading forex in itself [I][U]is[/U][/I] any more risky than trading stocks. I think a lot of the reason it’s perceived as riskier has to do with the behaviour of its market participants.
Forex, because of its ready accessibility, high leverage availability, ability to be traded with minimal capital, widespread promotion and marketing, and so on, attracts more than its share of newbies with unrealistic expectations and/or a gambling mentality, and there’s a whole very successful industry out there (and some of it “in here” as well, unfortunately) whose own business model is predicated on attracting people who will steadily lose most or all of their money.
For these reasons there’s a widespread [I][U]perception[/U][/I] that it’s “the fact that it’s forex” that carries the risk.
One of the guys on CNBC used to repeatedly refer to the “highly risky forex markets”. It drove me crazy. The forex markets are not riskier than other markets. In fact, they are less risky than most if you look at volatility. I actually did a comparison a while back. Really, it’s only the short-term interest rate market that is less volatile.
That said, the actual behavior of traders in the forex market (talking retail) is more risky. Obviously, that doesn’t apply to everyone, but on average forex traders use a lot more leverage than do stock traders.
IMO that is correct. Due to the high liquidity of the forex market, margins are low and lower margin brings higher risk. That also sets as a premise for wider price movements which may bring fast profits but also blow up an account faster.
Trading stocks may not be that “interesting” in terms of price changes but looks more promising in bringing profits in long term (if you have the patience and capital to stay invested for a longer period).