To be honest, there are few similarities between Forex and penny stocks. In fact, they seem to be competing against each other for the favor of investors and traders alike. Since both of them are highly speculative in nature, offering huge potential payouts and minimal investments, it usually comes down to traders’ individual preferences, rather than superior qualities of penny stocks or Forex. Naturally, there are differences and advantages, and we will get to them in time.
What are penny stocks?
Well, contrary to their name, the value of these stocks isn’t usually expressed in pennies. Not anymore. Don’t get me wrong, some stocks do trade in pennies (but aren’t penny stocks per se) while others are valued much higher than a penny (and still count as penny stocks, for some reason). There is no clear consensus as to what would constitute a penny stock, but there are some generally accepted criteria:
For one, penny stocks are stocks of a public company traded at very low prices. Their goal is usually market capitalization. The top price for a penny stock is $5 per stock, but the price alone does not define them. Furthermore, penny stocks do not trade on major exchanges; this is an ironclad rule which discounts most stocks of large companies which trade for less than $5 and would otherwise fit the description. An informal criteria for a penny stock would be high risk and low liquidity, unlike Forex which can be more versatile in this regard.
Penny stocks vs Forex
Since both Forex and penny stocks allow extremely high returns even to those who cannot afford normal stocks or huge trades, they essentially target the same group of clients. Forex offers extremely high leverage while penny stocks counter with sheer growth capacity. However, penny stocks require a great deal of effort to pick the right ones, even more than regular stocks and way more than Forex. And even successful penny stock traders will lose most of the time. Forex traders, on the other hand have huge leverage at their disposal. Currencies are arguably easier to understand than stocks, and data are readily available, in stark contrast to companies behind penny stocks. The possibility for fraud is much lower on Forex markets, and besides, pump and dump schemes may work with cheap stocks, but currency is on a different level entirely. Besides, Forex deals require as little as 1% of the trade in margin, whereas penny stocks have to be acquired and held. Even if some penny stocks offer far greater profits in the long run, Forex is faster and far more regulated. The best part is that no Forex trader is going to suffer shameless advertizing of unscrupulous penny stock “traders” looking for a sucker to scam.
Having said that, both penny stocks and Forex appeal to people who believe they can make a lot of money, fast. But both require years of commitment and dedication, so choose wisely.
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