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Shares or forex: Which is riskier?

As the biggest financial market in the world, forex presents plenty of opportunities for investors. But is it riskier than trading shares? Read on to find out.

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Fact checked

Forex (short for foreign exchange) forms the biggest financial market in the world, with a daily turnaround exceeding $4 trillion. In contrast, the daily turnaround for shares is approximately only $60 billion. The forex market is also completely over-the-counter, which means it operates through online platforms alone and can be accessed 24/7. Without a physical market location, it has significantly greater freedom from regulation than the share market does.

As such, forex trading presents many opportunities for different kinds of investors. However, investors need to understand that trading forex is fundamentally riskier than trading shares.

Compare and search share trading and forex trading accounts

Data indicated here is updated regularly
Name Product Standard brokerage fee Inactivity fee Markets International
IG Share Trading
Finder Award
IG Share Trading
AUD 8
AUD 50 per quarter if you make fewer than three trades in that period
ASX shares, Global shares, Forex, CFDs, Margin trading
Yes
Brokerage discount: $5 on Australian shares for active traders & $0 commission on US and global shares
Enjoy some of the lowest brokerage fees on the market when trading Australian shares, international shares, forex and CFDs, plus get access to 24-hour customer support.
eToro Share Trading (US stocks)
USD 0
USD 10 per month if there’s been no login for 12 months
Forex, CFDs, US shares
Yes
Zero brokerage share trading on US stocks with trades as low as $50.
Note: This broker offers CFDs which are volatile investment products and most clients lose money trading CFDs with this provider.
Join the world’s biggest social trading network when you trade stocks, commodities and forex from the one account.
CMC Markets Stockbroking
AUD 11
No
ASX shares, Global shares, Forex, CFDs, Margin trading, Options trading, mFunds
Yes
$0 brokerage on global shares including US, UK and Japan markets.
Trade up to 9,000 products, including shares, managed funds, forex, commodities and cryptocurrencies, plus access up to 15 major global and Australian stock exchanges.
ThinkMarkets Share Trading
AUD 8
No
ASX shares, ETFs
No
Fast sign-up: Start trading in just a few minutes
Switch between your ASX share trading account and your forex account on your mobile and access some of the lowest brokerage fees on the market with a flat $8 commission (until $200,000).
ANZ Share Investing
AUD 19.95
No
ASX shares, Global shares, Margin trading, Options trading
Yes
Earn 1 Qantas Point per AU$3 spent on brokerage fees on certain instruments.
Access Morningstar reports, company announcements and and live pricing via ANZ’s share investing platform. Available for desktop and mobile.
Westpac Online Investing Account
AUD 19.95
AUD 63.50 per year on the global markets account
ASX shares, Global shares, Options trading, US shares
Yes
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Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares.

Data indicated here is updated regularly
Name Product Minimum Opening Deposit Minimum Spreads for Major Currencies Commission Minimum Trade Size Platforms
Plus500 Forex Trading
AUD 100
0.7 - 3.0 pips
$0
0.01 lots
Plus500 Web Trader
Margin FX is a complex financial product and traders are at high-risk of losing all of or more than their initial investment.
Finder exclusive offer: Open a new trading account and receive a welcome bonus of AU$110 when you deposit your first $370 and enter the bonus code “Special200”. T&C’s apply.
Open an account and experience Plus500's easy-to-use proprietary trading platform, 24/7 online chat support and free real-time forex quotes.
IG Forex Trading
AUD 0
0.6 - 1.5 pips
$0
1 lot
MetaTrader 4
ProReal Time
Margin FX is a complex financial product and traders are at high-risk of losing all of or more than their initial investment.
Introductory offer: For the first two weeks of trading, take advantage of IG's lower minimum trade sizes to help you build confidence.
Choice of trading platforms. Choose optional extras like advanced charting, reporting and order types. Over 90 currency pairs to choose from.
eToro Forex Trading
USD 50
1.0 pips
$0
US$200 (to CopyTrade)
eToro Trading Platform
Margin FX is a complex financial product and traders are at high-risk of losing all of or more than their initial investment.
Social trading, advanced charting tools, plus receive exclusive benefits through the eToro Club (membership is tiered based on the equity in your trading account).
IC Markets Forex Trading (Raw Spread account)
USD 200
From 0.0-0.1 pips
AU$3.50 per 100k traded
0.01 lots
MetaTrader 4
MetaTrader 5
cTrader
Margin FX is a complex financial product and traders are at high-risk of losing all of or more than their initial investment.
City Index Forex Trading
AUD 0
0.5 - 1.22 pips
$0
0.01 lots
MetaTrader 4
At Pro
Advantage Web
Margin FX is a complex financial product and traders are at high-risk of losing all of or more than their initial investment.
Choice of trading platforms, integrated Reuters news and device-synching so you can monitor trades across multiple devices.
Blueberry Markets Forex Trading
$100
From 0.0 pips
$0
0.01
MetaTrader4, MetaTrader5
Margin FX is a complex financial product and traders are at high-risk of losing all of or more than their initial investment.
Bottom of the market fees on forex, CFDs and commodities with 24/7 quality customer service.
Pepperstone Forex Trading (Razor Account)
USD 200
0.0 - 0.1 pips
AU$3.50 per 100k traded
0.01 lots
MetaTrader 4
MetaTrader 5
cTrader
Margin FX is a complex financial product and traders are at high-risk of losing all of or more than their initial investment.
Choose from a range of fee-free funding methods, plus a suite of 10 different apps available as part of Pepperstone's Smarter Trading Tools.
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Disclaimer: CFDs and forex are complex financial products that come with a high risk of losing money. Most retail client accounts lose money trading CFDs and forex. Consider whether you can afford to lose your money.

Leverage risk

Taking a forex position is not an investment in the sense of holding a security medium to long term for appreciation. Large fluctuations in exchange rates occur very rarely. In forex trading an investor must take a short-term leveraged forex position to magnify any potential gains. While share brokers only allow a leveraged 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 also referred to as “margin trading”.

While margin trading increases potential gains, it also steeply magnifies the risks involved. A small market movement can have an enormous impact upon the worth of a forex portfolio. If an investor cannot meet their margin calls, their position will also be closed out. Unlike leveraging in share trading, this closure is without any forewarning. All in all, leverage is highly risky in the forex context.

Country risk

Forex trading also bears higher risk as forex movements are much harder to predict. Investors can use the fundamentals of a company’s shares to forecast their future prices, but there are countless factors that may affect the value of a country’s currency.

Some of these factors are systematic, such as the Gross Domestic Output (GDP), the Consumer Price Index (CPI) and the employment rate. However, it has been historically observed that it is totally unexpected, ad hoc events that most dramatically affect exchange rates. Brexit is a perfect example.

A political situation, a decision by the country’s central bank or a natural disaster can affect an exchange rate in unpredictable ways. Even the most skilled and up-to-date investors will struggle to fully foresee the effects of these factors.

In addition, a country’s currency is always quoted in relation to another, so, whilst a shareholder can primarily focus on the financial prospects of one company, a forex trader has to monitor the wellbeing of two countries. Likewise, unlike shares, forex has very few structured models and databases accessible by private investors.

The substantial risks of forex were clearly illustrated in the Asian Financial Crisis of 1997, where multiple Asian currencies spiralled out of control.

Counterparty risk

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

Risk management strategies

An investor can use stop-loss orders and profit limit orders to reduce their forex risk exposure. Both of these close out a forex position if the exchange rate has reached a certain point.However, a fee will be charged for both of these orders and their utility is highly limited in comparison with the tools available for shares.

Hedging and diversification

Despite these risks, forex is recommendable to investors to complement their investment portfolio. The risk characteristics and international nature of forex offers an investor two layers of diversification. Holding a limited amount of a country’s currency can also be used to hedge against interest rate risks for said country’s fixed income securities.

The bottom line for retail investors is that despite the convenience of forex trading, forex should only be considered as a part of their investment portfolio if they have both the knowledge and the risk appetite.

Comparing the risk between forex and shares - top tips for investors

Forex is fundamentally riskier than shares

You need to keep in mind that due to the country, leverage and counterparty risks mentioned above, currencies are riskier than shares 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 directions.

Know the countries of your currencies

With so many factors to consider when trading currencies, you should study the country pairs you are trading in depth. A crucial starting point will be seeing how your countries have reacted to historical events that have significantly affected their exchange rates. This will allow you to forecast your currencies’ price sensitivity to similar future events.

Keep up to date with the news

You should closely monitor the national, regional and international news for your countries on a daily basis.Pay close attention, as a small event may snowball to have a dramatic impact upon an exchange rate.

Use stop-loss orders and profit limit orders

You can use these orders to safeguard your forex portfolio through automatically closing off your positions. However, do keep in mind that these will limit your potential gains and you will be charged a fee for them.

Do not risk more than what you can afford to lose

Many currencies in the forex market have been going through a rollercoaster ride recently. You need to understand that if you are 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.

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