Categories: Investment Strategies & Comparisons

Penny Stocks vs. Forex: Which Is Better?

Penny Stocks vs. Forex: Which Is Better for You?

When it comes to day trading for beginners, there seem to be only two alternatives capable of assuring maximum profit gains with little investment and a short time scale. You’ve got a choice between foreign exchange (forex) trading on the left, i.e. the swap of one currency for another in the expectation that the exchange rate will either go up or down, and penny trading, i.e. investing in a small-cap stock that’s trading at less than $5 per share, on the right. However, beware of the catch: when you’re investing in a low valued company or trading on a forex pair – which normally involves using borrowed funds in the form of leverage – either way, you’re taking on a considerable risk. It’s important to know the advantages and disadvantages of forex vs. penny stocks to help you figure out which is the right trading strategy for you.

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Penny Stocks: On The Hunt For The Big Win

Although penny stocks are highly speculative, millions of people buy penny stocks online on a daily basis. This is because they offer a chance to “get rich quick” by cherry picking the market for relatively unheard-of companies.
Penny stock traders are essentially speculating on a possible short-term increase or decrease in value following research about their performance which has surfaced through the media, word of mouth referrals and previous earnings per share (EPS) reports.
When selecting this type of trading, it is important to find good penny stocks, that means companies that are either at their early stages, and hence have a solid chance of rising to stardom (if you’re going long), or established publicly-traded businesses worth less than $5 per share, and that you predict will fall to serious lows (if you’re going short).
The main advantage penny stock trading has over forex trading is its higher levels of uncertainty (i.e. high risk) which is ultimately also associated with high potential returns. For example, let’s say you’ve decided to trade on ABC after reading that it’s recently raised funds for a new manufacturing facility in California. If you predicted correctly, and the stock is currently valued at a very low price, say $3.4 per share, you could easily make 400 dollars by investing a quarter of that, if the stock suddenly skyrockets by 135% to $8.22. And, through hard work, persistence and the right penny stock trading strategy, you can quickly duplicate this into a reliable money-making formula. Here’s a list of the top 10 penny stocks in the UK, and here are some of the best penny stocks under $5 to watch for, as of March 2017.
The main disadvantage – other than the fact that it can be a bit tricky to find the right stock out of hundreds of different stocks – is that you have to be increasingly more careful with where you’re get your information from. There are a lot of scammers out there that are ready to make money from tricking investors into buying worthless stocks (or short selling reliable stocks), for the chance of profiting off of their losses. Some of the most commons scams to look out for include Pump & Dump Schemes, Reverse Merger, Offshore Scams and The Guru Scam. We strongly recommend Googling these terms for more info.

Forex: A High Leverage Investment with Low Capital

The forex market is a completely different ballpark requiring a far lesser skill level, and therefore is considered more appropriate for beginner traders who prefer investing in a readily-changing and easy to follow asset class such as foreign exchange rate between two countries, rather than trying to pick individual stocks. Besides an opportunity to increase personal wealth with little or no previous knowledge, the other main appeal of forex trading stems from the fact that there is always liquidity in the market: daily activity of banks, financial institutes and other market makers, often exceeds $5 trillion a day, with over $1.5 trillion of that conducted in the form of spot trading or futures.
There are two other advantages worth mentioning: one is high volatility (=price fluctuations throughout the day, plus, note that trading is possible 24 hours a day, 5 days a week), and the other is high leverage. In a nutshell, the existence of volatility in the forex market enables investors to take advantage of exchange rate fluctuations for speculative purposes. Leverage is the ability to trade on a large amount of money, using very little collateral. Forex investors are typically required to put up as little as 0.5% or 1% of the total value of a forex contract in margin (signified as 1:100 or 1:200 ratio). That means you have the opportunity to get started in trading with as little as a couple of hundred dollars and have a reasonable opportunity to make 20%-90% in profits while trading fewer than 10 minutes a day.
However, there’s no such thing as a free lunch, and you have to take in mind that forex investors, unlike penny stock investors, face the chance of rapidly losing all their invested funds when the market moves against the direction of an open position. That’s why leverage is often called a double-edged sword. You need to look out for general financial trends and unexpected price fluctuations to ensure your position don’t fall below their initial margin levels. That said, it’s still the best method of trading for anyone who wants to make money online.

Ready to Make Money Trading in Forex or Penny Stocks?

Now that you know the pros and cons of each investment scheme, you’re probably asking yourself “Where should I trade penny stocks or forex?” What you want to look for is a broker capable of offering you both penny stocks and forex with very low commissions and contract fees. Some of the major vendors in the market will also allow you to first open a demo account in order to practice forex and penny stock trading in a risk-free environment.
Our recommendation is Fortrade Limited – a UK-based brokerage firm authorised and regulated by the Financial Conduct Authority (FCA), meaning your investments are protected at all times and you are you covered up to £50,000 per investment by the Financial Services Compensation Scheme (FSCS). Fortrade has also recently introduced a designated forex and stock trading app for iOS and Android devices.
Before you start forex or penny share trading, you should keep in mind one more thing: both penny stocks and forex have a high level of volatility (i.e., the degree of variation of a trading price, both up and down, tends to fluctuate frequently over a short period of time). Due to this fact, there’s a great potential to make a lot of money and to lose a lot of money when investing in them.