Investors will have listened to Prime Minister Rishi Sunak’s recent year-end speech with interest, as the PM outlined his plans to tackle inflation, stabilise the base interest in the UK and reduce the cost of living.
However, there was little in the way of detail in the PM’s speech, and while he pledged to halve inflation from its current level of 10.7% by the end of 2023, this will leave it well above the Bank of England’s (BoE’s) target of 2%.
This raises an interesting question from the perspective of investors, who must look to organise their portfolios if they’re to profit accordingly in the year ahead.
In this article, we’ll ask whether stocks or forex offer the more viable option this year, while appraising how each asset class will react to the wider macroeconomic climate.
Forex and Share Trading – An Introduction
The forex market or foreign exchange is the largest and most liquid financial market in the world, with more than $6.6 trillion traded globally on a daily basis within this space.
This market sees the exchange of international currencies, which are traded in pairs and considered as speculative assets. This means that it’s possible to ‘go short’ and trade forex without assuming ownership of the underlying financial instruments, creating the opportunity to profit even as prices depreciate.
So-called “major currencies” account for approximately 68% of all daily FX trades, while these highly liquid entities are governed by a free-floating exchange rate that’s vulnerable to investor sentiment, demand and macroeconomic factors such as the inflation rate.
Whole most ‘minor’ and ‘exotic’ currency pairs are also underpinned by a free floating exchange rate, such entities are considerably more volatile and less liquid in terms of the ease with which they can be bought and sold.
In the case of stock market trading, you’re required to invest in the shares of specific companies across a range of markets. The most common method of investment in this market compels you to buy-and-hold stocks, whereby you identify viable equities and purchase them in the hope that they’ll appreciate in value before the time comes to sell.
Of course, you can also speculate on stocks and their price movements, while trading indexes to target shares in a specific industry, country or by market capitalisation values.
When determining how to buy shares or which stocks to target, there are a number of potential determining factors. These include your risk profile, preferred timeframes and underlying knowledge base, which should inform your decisions and help you to build viable portfolios over time.
As you can buy and hold stocks, this asset class provides a much more secure store of wealth than forex, while it’s also considered to be less volatile and more stable.
How to Appraise the Differences Between Forex and Shares
While you can factor this information and the prevailing market conditions in 2023 to inform your choice of stocks, it’s also important to understand the universal ways of appraising the core differences between forex and stocks. Here are some considerations to keep in mind:
- #1. Volatility: Volatility is a measure of short-term price fluctuations, with the forex market known to be considerably more volatile than stocks. In the FX market, risk hungry traders often leverage this innate volatility to their advantage, by trading the numerous price shifts that occur over the course of hours and even minutes. Conversely, share prices tend to fluctuate less wildly, providing a better opportunity for investors with a longer-term outlook and strategy.
- #2. Leverage: Leverage refers to the use of borrowed funds to increase the size of trading positions. Broadly speaking, stock traders have minimal leverage of around 2:1 in relation to their margin and cash deposit, where this can increase to 100:1 in the forex market. In theory, this enables you to open disproportionately large forex positions that can deliver exponential returns, although there’s also the potential to lose far more than your initial deposit.
- #3. Trading Hours: While both stock and forex markets are relatively accessible in the digital age, the fx market can be traded 24 hours-a-day for five days each week. Conversely stock trading is limited to exchange hours, which generally run from 9.30am to 4.00pm Eastern Standard Time (EST), Monday through Friday. This creates additional flexibility and liquidity for forex traders, which is particularly ideal for scalpers and day traders.
The Last Word – Forex or Stocks in 2023?
As we can see, forex trading offers more viable short-term investment opportunities, which may be ideal for risk hungry investors who want to leverage volatility and price shifts to their advantage.
Conversely, stocks are considerably less volatile and liquid, making them more suited to long-term trading strategies (such as buy and hold) and investors who want to hold more secure stores of wealth over time.
But what does this mean in 2023? Well, while inflation is set to remain considerably higher than the targets set by most central banks, it could be reduced to around 5% by the end of 2023. Given that rampant inflation erodes the value and purchasing power of international currencies, the potential for this metric to fall gradually this year could see the forex market offer an increasingly viable option.
Additionally, we’re set to see more countries across the globe enter into a recession through 2023, with this likely to reduce share values across the board and make long-term investment vehicles less appealing.
