Finder makes money from featured partners, but editorial opinions are our own. Advertiser disclosure

Forex trading vs. stock trading: Which is riskier?

Weigh leverage, movement, gap risks and more.

Foreign exchange or forex is the biggest financial market in the world. It’s only accessible through online platforms 24/7. Stocks, on the other hand, are heavily regulated through physical exchanges like the New York Stock Exchange or Nasdaq, and are only traded while the exchanges are open. Each present their own unique risks.

What are the risks of the forex and stock markets?

Before deciding which to invest in, consider the risks of both forex and stock markets.

Leverage risk

Taking a forex position is not an investment in the sense of holding a security medium- to long-term for appreciation, like many investors do with stocks. Large fluctuations in exchange rates are rare. Investors in forex must take a short-term leveraged position to magnify potential gains.

Stock brokers only allow a leverage ratio of 2:1, forex platforms allow a leverage ratio of up to 50:1, or even 200:1 in some countries. Leveraging is done through borrowing money from a broker and is sometimes referred as “margin trading.”

While margin trading increases potential gains, it magnifies the risks involved. A small market movement can have an enormous impact upon the value of a forex portfolio. If an investor can’t meet the margin calls, their position is closed out. Unlike leveraging in stock trading, this closure comes without warning. All in all, leverage is risky for forex investments.

Country risk

Forex trading is riskier and is more difficult to predict than stock movement. Stock investors use the fundamentals of a company’s stock to forecast its future prices, but there are more factors that affect the value of a country’s currency.

Some of these factors are systemic, such as the gross domestic output (GDP), the Consumer Price Index (CPI) and the employment rate. However, historically it’s the unexpected or uncontrollable events that most dramatically affect exchange rates. A political situation, a decision by the country’s central bank or a natural disaster can affect an exchange rate in unpredictable ways.

In addition, a country’s currency is always quoted in relation to another currency. So, while a shareholder can focus on the financial prospects of just one company, a forex trader has to monitor two countries.

Counterparty risk

Unlike stocks, forex trades are not guaranteed clearing by a physical exchange or clearing house. This means an investor also faces significant counterparty risk. For example, their dealer might default in delivering the purchased currency.

Gap risk

Stock trading are more at risk of gaps than forex trading. Gaps occur between trading days, and it’s not uncommon for stocks or stock indices to “gap” higher or lower several percentage points in the opening minute of trading. Gapping makes stock trading more volatile and unpredictable. Though gaps can occur in forex trading when markets close for the weekend or holidays pause normal trading activity, it happens much less frequently.

Spread risk

Spreads are determined by the trading platform. It’s the difference between the buy and sell price that goes to the platform to cover its costs. Generally, the more liquid the market is for a specific stock or currency pair, the smaller the spread. So, the sheer volume of forex trading gives it the advantage in liquidity, especially over some smaller stocks that are traded less frequently. This risk can be minimized in stock trading by utilizing limit orders rather than market orders.

Risk management strategies

Though all investments are unpredictable, there are a few ways to help mitigate risk:

  • Stop-loss orders and profit limit orders. Investors can use these to reduce their risk exposure in both forex and stocks. These orders close out a position if the price has reached a certain point, either a fixed or a percentage value. However, because stocks can sustain trends for much longer than forex moves, these orders are less useful in forex than in stocks.
  • Hedging and diversification. Despite the risks, forex is recommended to investors looking to complement their investment portfolio. The risk characteristics and international nature of forex offers an investor two layers of diversification. And if an investor has significant exposure to a certain country or currency, forex can also be used to hedge against interest rate risks for said country’s fixed-income securities.

Compare and search stock trading and forex trading accounts

1 - 9 of 9
Name Product USFST Ratings Available asset types Stock trade fee Minimum deposit Cash sweep APY Signup bonus
Tastytrade
Finder Score: 4.4 / 5: ★★★★★
Tastytrade
★★★★★
Stocks, Options, ETFs, Cryptocurrency, Futures, Treasury Bills
$0
$0
N/A
Get $50-$5,000
Competitive, capped options commissions, with a reliable trading platform designed for serious traders.
SoFi Invest®
Finder Score: 4.2 / 5: ★★★★★
SoFi Invest®
★★★★★
Stocks, Options, Mutual funds, ETFs, Alternatives
$0
$0
0.02%
Get up to $1,000 in stock
Zero-commission stocks, ETFs and options, with no options per-contract fees. Plus, a no-advisory-fee robo-advisor and complimentary access to financial planners.
Robinhood
Finder Score: 4.5 / 5: ★★★★★
Robinhood
★★★★★
Stocks, Options, ETFs, Cryptocurrency
$0
$0
4.5%
Get a free stock
Trade stocks, options, ETFs and crypto without commissions and on a user-friendly platform. Plus, a 1% IRA match and no options contract fees.
OPTO
Finder Score: 3.1 / 5: ★★★★★
OPTO
★★★★★
Stocks, ETFs
$0
$0
N/A
Earn up to $300
AI-driven thematic investing, with proprietary research, fractional shares and commission-free stocks and ETFs.
eToro
Finder Score: 4 / 5: ★★★★★
EXCLUSIVE
eToro
★★★★★
Stocks, Options, ETFs, Cryptocurrency
$0
$0
4.9%
FINDER EXCLUSIVE: Get a guaranteed $15 bonus
No commission stock, ETF and options trades, with 4.9% interest on your options account balance and no options contract fees.
Public.com
Finder Score: 4.3 / 5: ★★★★★
Public.com
★★★★★
Stocks, Bonds, Options, ETFs, Cryptocurrency, Alternatives, Treasury Bills, High-yield cash account
$0
$0
4.6%
Get up to $10,000 and transfer fees covered
Build a diversified portfolio of stocks, bonds, options, ETFs, crypto and alternative assets, with a high-yield cash account and options contract rebates.
Stash
Finder Score: 3.7 / 5: ★★★★★
Stash
★★★★★
Stocks, ETFs
$0
$0
0.1%
Get $10 when you sign up and deposit $5
Automated investing, individual stock and ETF investing and banking services for as low as $3 per month.
Wealthfront
Finder Score: 4.5 / 5: ★★★★★
Wealthfront
★★★★★
Stocks, ETFs
$0
$500
5%
Get $50
Automated stock and bond ETF investing with the ability to trade individual stocks for as little as $1 apiece.
Zacks Trade
Finder Score: 3.8 / 5: ★★★★★
Zacks Trade
★★★★★
Stocks, Bonds, Mutual funds, ETFs, CDs
$0.01
$250
2.83%
Get up to $500
Trade stocks, options, ETFs, mutual funds and bonds, with powerful trading tools and low margin rates.
loading

Paid non-client promotion. Finder does not invest money with providers on this page. If a brand is a referral partner, we're paid when you click or tap through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company. Learn more about how we make money.

Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.

1 - 2 of 2
Name Product USFST Available asset types Maximum Leverage Annual fee
Forex.com
Not rated yet
Forex.com
Currencies, Forex
Up to 50:1
0%
Largest forex broker in the United States with assets of $1.449 billion.
Interactive Brokers
Finder Score: 4.6 / 5: ★★★★★
Interactive Brokers
Stocks, Bonds, Options, Mutual funds, ETFs, Cryptocurrency, Futures, Forex, Treasury Bills
Varies
0%
Zero commission stock and ETF trades, with global market access and pro-grade trading tools.
loading

Tips for comparing the risks between forex and stocks

Due to the country, leverage and counterparty risks, currencies are riskier than stocks for the private investor. It’s true that you don’t have to leverage to invest in forex, but this will render your potential gains virtually negligible. You’re better off focusing on what you can do to predict forex price movements.

  • Know the countries of your currencies. With so many factors to consider when trading currencies, study the country pairs you’re trading in depth. A crucial starting point is seeing how your countries have reacted to historical events that have significantly affected their exchange rates.
  • Follow the news. Closely monitor the national, regional and international news for your countries daily. Even a small event may snowball and have a dramatic impact upon an exchange rate.
  • Use stop-loss orders and profit limit orders. Use these orders to safeguard your forex portfolio through automatically closing your positions. These will limit your potential gains and you may be charged a fee for them.
  • Don’t risk more than you can afford to lose. Many currencies have recently experienced a rollercoaster ride of movement. Understand that if you’re unable to meet a margin call, your position may be closed immediately and you might not be able to recover any of your initial investment.

Bottom line

Both stock and forex markets involve a range of risks, but forex is riskier due to the leverage involved and the number of factors that influence currencies. Though it’s an easy option for your investment and can help diversify your portfolio, only consider it as a part of your retail investor portfolio with both the knowledge and appetite for risk.

Help reduce your risks by learning more about trading, gaining experience and implementing risk management strategies. And your choice of a stock trading or forex trading platform can help you do all three.

Written by

Writer

Wilson Zhang was a contributor for Finder, specialising in investments and robo-advice. See full bio

More guides on Finder

Ask a question

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and finder.com Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
Go to site