Are you new to trading? If you are, then you’re probably wondering which is better: penny stocks or forex. Well, let me tell you firsthand that there’s no hard or fast answer to this as to which is better, more profitable, or easy.
There will be pros and cons for each market. But don’t worry, I will walk you through which of the two is more appropriate for you personally. And with a healthy thirst for information and a desire to find important data that impacts stocks as well as the sectors you trade in, you can become a successful penny stock or forex trader.
Before we jump straight to the answer, it is best to familiarize yourself with the basics of penny stocks and forex markets so you’ll know which is the most appealing investment for you and to also avoid catastrophic losses.
What You Should Know About Penny Stocks
Basically, penny stocks are stocks that trade for less than $5 per share (as detailed by the US Securities and Exchange Commission). They are a common share of a small public company, trading at low prices. These are likely stocks from companies that are new, do not have an established track record yet in the industry, or have fallen on hard times.
Experienced penny stock investors understand that to be successful with their investment, they have to look for signs of a potential business turnaround.
To make money in trading penny stocks, you first have to find someone who is willing to sell it to you at a bargain price. And that’s part of the challenge: finding them.
If a turnaround is expected of a company, a penny stock trader is more likely going to reap rewards. That is why it only makes sense that it’s going to be more challenging to buy those stocks.
Your goal should be simple: find undervalued stock with a promising outlook, strong financials, and a positive value. Once you’ve purchased a potential good penny stock, you also need to sell it.
Sure, you can hold onto it, but you’ll take your chance in the future when it’s already hot. Not to mention that not all penny stock companies will eventually become big companies. That’s why you TRADE in penny stocks, and NOT INVEST or hold them for the long term.
Can You Get Rich Off Penny Stocks?
Yes, penny stocks can make you rich because, after all, they make real money. Just consider Amazon, for instance. Yes, that e-commerce company you’re thinking of right now. In its 1997 IPO, it was under $2 per share.
In short, it is one of the top penny stock success stories ever produced. And yet as of April 2021, it’s already worth $3,409 per share. From a penny stock gamble to now one of the biggest companies in the world.
Other successful penny stock companies in history
This list could go on, including the Turtle Beach Corporation, True Religion (NASDAQ: TRLG), Monster Beverage Corporation, Mylan N.V., Ford Motor Company, and yep even Apple Inc.
But don’t get FOMO. Successful companies normally take years to build, more so if they begin small.
What You Should Know About Forex
On the other hand, Forex trading (for foreign exchange trading) is the conversion of one currency into another currency. Today, it is one of the most actively traded markets worldwide.
From a birds-eye view, there’s a network of buyers and sellers in foreign exchange. These market participants transfer currency between each other at a certain price to which they agree.
If you’ve ever traveled abroad, then it is likely that you have already made a forex transaction. But that exchange was done due to a practical reason. If the currency conversion is done for the main purpose of earning a profit, then that’s called forex trading.
I’ll discuss the investment capital requirement, trading hours, and market size in a bit. For now, I’ll focus on how the foreign exchange market is one of the most liquid financial markets in the world and what makes it popular.
Unlike commodities or shares, forex trading happens directly between two parties and in an over-the-counter market or OTC market and not on exchanges. The forex market itself is spread across major trading centers in varying time zones: New York, London, Sydney, and London, for instance.
How Much Money Can You Make from Forex Trading?
Beginner traders often ask this question. Theoretically speaking, the answer would be as much as you can handle. But don’t get too excited to put all your hard-earned money in forex trading.
That’s because, in practice, the monthly income of a forex trader is rarely consistent. Not to mention there are also various factors that may influence your actual monthly performance. So, if you have a regular job and want to venture into the foreign currency market or into forex trading, I suggest that you don’t quit your job yet.
The good news is forex is highly leveraged. The term leverage means the use of a borrowed capital or money to invest in a currency. So, by borrowing money from a broker, you can trade for larger positions and thus, magnifies your returns in favorable moments.
Let’s say you want to trade in $100,000. Does that mean you also need $100,000 investment capital? The answer is no. In fact, you can open a trading account with a broker and deposit only $1,000.
Then, you do your research and analysis when the USD/GBP rate (for instance) will surge. You will then buy the currency to the value of $100,000. If the USD/GBP increases overnight by 1% overnight, that means your trade is now worth $101,000. That leaves you with a $1,000 profit. Of course, beware that you’ll also lose $1,000 if the currency rate drops by 1% as well.
Penny Stock Trading vs. Forex Trading
First off, you need to study FIRST before you start trading and that does not require any money unless you join programs and groups. Well, that can be reserved for another post, so let me just focus on the basics and minimums as recommended by brokers.
Capital Requirement and Why it Matters
Investment capital for penny stocks vs forex trading differs. As penny stocks are cheaply priced, you don’t usually need much money to begin. For instance, at $500, you can get 1000 shares of a penny stock priced at $0.50. Yep, penny stocks are “penny” stocks for a reason.
But to open up a trading account, you will need more money and costs will depend on the service or brokerage you use. There may also be variations on per-trade fees, maintenance, activity, etc. Some stockbrokers may allow you to open $100 and $25,000 deposits if you want to be a day trader.
Out of the brokers I can suggest would be the eToro. The platform offers penny stocks trading. In the US, the minimum first deposit would be $50.
How do you protect your capital when trading penny stocks?
As with any activity in the stock market, it is important to understand the risks to protect your capital when trading penny stocks. Do your research as much as possible about the company, its products, its history, as well as its future outlook to find a diamond in the rough.
Then, diversity. I suggest buying at least three stocks so it will not wipe out your capital if one of them drops.
Some brokers have a minimum deposit requirement of only $10 to open a forex account, while some $100. The range is somewhere between $10 to $100. How much money you will need to begin forex trading is one of the first issues you need to address and it will be an important determinant of your success in the future.
Remember also that not all forex traders are alike and not all trades in the same manner. Day traders may not need the same deposit to start trading in forex as swing traders do.
All right, so let’s answer the question of why the amount of money you trade forex matters. As for me, I am more familiar with swing trading, but I believe it matters if you risk only 1% (maximum 3%) of your capital on one trade.
For example, your forex account is $100. This means that you risk 1% per trade. Trading this way is a good technique because you can average a few dollars of profit every day. To some traders, however, they don’t prefer building their forex account slowly so they’d prefer risking $10 or $20 per trade.
In an attempt to earn thousands as quickly as possible, this strategy may also result in a $0 balance and you don’t want that.
How do you protect your capital when trading forex?
Just like with penny stocks, you can protect your capital when trading forex by doing research for every currency pair or the currency markets you can think of. After doing your homework, diversify.
In short, don’t put all your eggs in one basket, and do not risk all your hard-earned money in a single trade. I also recommend you to use a stop loss. A forex stop loss is a function to limit losses in volatile markets. Offered by brokers, this function sets a stop loss level or a certain amount of pips away from the price.
For normal trading hours, both floors of the Nasdaq and the NYSE are open at 9:30 EST and close at 16:00 EST. Then, the pre-market trading for the penny stock market is between 4:00 EST to 9:30 EST.
The forex market is open 24 hours a day in various parts of the world. This is because of the different international time zones. On the Sydney floor, it opens at 17:00 and closes at 02:00 EST. In New York, it opens at 08:00 and closes at 17:00 EST.
Penny Stock Trading: Who is it Most Suitable For?
Penny stock trading is ideally suited for investors who have limited investment capital and yet are familiar with high-risk investments. These penny stocks investors should have both interests and time to do the necessary research needed for penny stock trading.
Forex Trading: Who is it Best For?
The forex trading market is a great fit for investors who prefer to put their money on basic assets, like currencies, instead of picking individual funds or stocks.
The Bottom Line: Which One Is Easier to Make Money In?
Both penny stocks and forex are potentially high-risk, high-return trading instruments. In my humble opinion, though, penny stocks are easier to make money in because there are fewer professionals trading them compared to forex.
Regulation of forex, which is an international market, is also a difficult issue. As for trading penny stocks, on the other hand, you don’t need a big account. Easy entry. And although it’s not for the faint of heart as it requires strong discipline and tolerance, once you learn the rules, there are plenty of benefits of trading penny stocks.
How about you? Do you trade penny stocks or forex? Share your comments below. I’d love to hear your story!