What Is the Difference Between Penny Stocks and Forex?

  • Mark Edwards ·
  • June 2, 2018

In terms of trading, beginner investors tend to be indecisive over which one to choose: Penny Stocks or Forex? In order to understand how these two concepts differ, let us first try and explain what they actually are.

What Are Penny Stocks?

While you may think that the term “stock penny” is self-explanatory, it is actually rather deceiving. The thing is that these stocks may not even cost a whole penny per share. They are defined as any stock priced at $5 or lower. Still, the vast majority of these stocks are priced under $1 per share.

Securities and Exchange Commission (SEC) rarely regulates penny stocks and they are usually traded on pink sheets and OTC bulletin boards. The SEC controls the transparency of the market by protecting the investors and maintaining an efficient market.

The reasons why penny stocks are widely recognized as speculative are:

  • Their trade is infrequent. There is no guarantee that you can sell them once you obtain them.
  • Their accurate price is hard to determine because it is difficult to find the exact quotations.

Another reason that makes the penny stocks slippery is their illiquidity. When your assets are liquid, it means you can rest assured you can take them whenever you want. Unfortunately, this is not the case with penny stocks.

Investing in penny stocks can be highly lucrative. At least, in theory.

The reason being that penny stock companies fluctuate dramatically on a daily basis. Shares can climb up from $0.25 to $1.5 in a week’s time. The biggest problem is that days can go by without a single buyer or seller in sight.

The truth is that even the most experienced of brokers shy away from them because of their volatile behavior.

What Is Forex?

An abbreviation for Foreign Exchange, Forex (or simply, FX) is a term used for the process of currency trade with the aim of making a profit from the price movements. Not only does Forex trading bring greater benefits but it also provides stability of the market.

What all experts agree on is the advantage of leverage Forex provides. The leverage is all about the currency pairs (EUR/USD, AUD/USD, USD/CHF, for example) which, depending on the exchange rates, can earn you a massive profit. Those pairs move in pips – the changes in value between two currencies. Small amounts of capital in your account can help you control a larger amount on the market.

To put it bluntly, if there is a leverage of 100:1, that means that each $1 in your account may place a trade worth $100. By the same token, 400:1 leverage lands you 400$ for each $1! Still, experts of this trade tend to go with lower leverage. Experience is often crucial here because knowing when to use leverage can save you large amounts of money.

The good thing about Forex market is that it is almost always open, unlike stock markets which work from Monday to Friday.

So, it all comes down to the fact that both have their perks and risks.

While buying and selling is predominantly the field of the FX market, the penny stock market is concerned with shares of the small companies.

The liquidity of the Forex market makes it highly stable. In addition to that, the public availability of all the information that affects the trading makes it transparent.

On the other hand, penny stock market is less transparent. Only the insiders and brokers have access to the precious information. The unpredictability of the movements only adds up to their downsides.

The Ultimate Comparison

These two options seem rather appealing to small traders because of the “get rich overnight” philosophy. With everything taken into consideration, those of you who are thinking about which option is better need to have this in mind:

  • There is a lot more fraud in the world of penny stocks. It allows newly found companies to bloom and there is no track record of their doings. This spells scam in the majority of cases.
  • The randomness of Forex overshadows its seeming reliability. The robots analyzing the swings in currencies will show abnormally fluctuating price movements which are impossible to keep track of.
  • Pennies can stagnate for indefinite periods of time. On the other hand, Forex operates with monetary pairs which are legitimate currencies, and therefore, you can count on their comparative stability.
  • The lack of information surrounding penny stocks often leads traders to seek insider knowledge elsewhere. Picking the right stock is thus made much more difficult.

Either way, anyone who aims at succeeding with penny stock or Forex has to make an informed decision. Depending on the risks and advantages involved, either one of these is good for beginner traders provided that they know what they’re doing.