Investing in Stocks vs. Forex vs. Futures

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Most people think of the stock market when they think of investing. Day traders and other investors may also participate in the futures and foreign exchange (forex) markets, and each of these markets works differently. Learn more about stocks, forex, and futures so you can make informed investment decisions.

Know the Risks of Day Trading

Day trading is defined by FINRA as purchasing and selling or selling and purchasing the same security on the same day in a margin account. While buying and selling securities quickly can be exciting and lead to a quick profit, substantial risks are also involved. The worst-case scenario is losing a significant sum of money quickly.

If you're planning to day trade, plan your strategy and stick to it. For many investors, buying and holding is a better strategy for long-term profits.

Day Trading Stocks 

Stocks give you a share of ownership in a company. If you're thinking of day trading stocks, here are some key facts you should know.

  • In the U.S., the minimum required starting capital to be a pattern day trader is $25,000. A pattern day trader is someone who executes four or more day trades within five business days.
  • Market hours are from 9:30 a.m. to 4 p.m. ET. Many day traders also place trades in the hour leading up to the open, called the pre-market. 
  • Some of the best times to trade shares are from 8:30 to 10:30 a.m. and 3 to 4 p.m. ET, which are when volume and volatility are high.
  • There's a huge number of stocks you can trade. You can trade the same stock or handful of stocks every day, as many traders do, or conduct research to find new stocks to day trade each day or week.

Based on those factors, you'll likely be able to see whether the stock market is a good one for you to day trade. If you don't have $25,000 available, then you'll want to consider forex or futures, which require less capital. If you can't trade during the optimal trading hours, then your efforts are unlikely to be as successful as they would be if you were available during those hours.

Day Trading Futures

Futures are an agreement to buy or sell a commodity at a future date. You can speculate on the direction the commodity will move. If you're thinking of day trading futures, here are some key facts you should know.

  • There's no legal minimum amount required to day trade futures. The more money you have, the more flexibility you will have in your trading decisions.
  • Trading hours for the E-mini S&P 500, whose ticker symbol is ES, are Sunday through Friday from 5 p.m. to 4 p.m. CT with a trading halt from 3:15 p.m. to 3:30 p.m. daily and a daily maintenance period Monday through Thursday from 4 p.m. to 5 p.m. 
  • Most futures day traders focus on opportunities in one futures contract after gaining proficiency at trading it. That said, there are day traders who prefer to trade where the action is, choosing futures contracts that are seeing big movements or volume on a particular day.

Based on those factors, you'll likely be able to see whether the futures market is a good one for you to day trade. If you have less than $25,000, then futures are a possibility for you.

If the ES isn't a good fit, consider day trading a global commodity, such as crude oil or futures associated with European or Asian stock markets.

Day Trading Forex

Foreign currency exchange trading involves using capital to invest in foreign currency based on how you expect change rates to fluctuate. The Securities and Exchange Commission notes that this type of trading can be very risky and isn't appropriate for every investor. If you're thinking of day trading forex, here are some key facts you should know.

  • Some forex brokers don't have a minimum investment requirement. A good rule of thumb for deciding how much to invest is not investing more than 1% of your forex account on a single trade. If you want to trade $100 at a time, your account should have $10,000.
  • Forex trades 24 hours a day from 5 p.m. ET on Sunday to 5 p.m. on Friday. Not all these times are ideal for day trading, however.
  • The best times to day trade forex depends on the pair being traded. The British pound/U.S. dollar (GBP/USD) may be best traded from 4 a.m. to 6 a.m. ET and 8 a.m. to 11 a.m. ET. The euro/U.S. dollar (EUR/USD) may be best traded from 9 a.m. to 2 p.m. ET.
  • There are many currency pairs to choose from, but new day traders should probably stick to the EUR/USD or GBP/USD. Those pairs offer more than enough volume and price movement to provide day trading income.

Based on those factors, you'll likely be able to see whether the forex market is a good one for you to day trade. If you have limited capital to start day trading, then forex may be your best option. The forex market is flexible in that you can trade outside of U.S. market hours, which helps if you have another job during normal U.S. business hours Monday through Friday.

Deciding What to Trade

The stock market may be the simplest option to understand when compared to forex and futures. It also requires a significant amount of capital. If your funds are limited, forex and futures may be best. With forex, you can start simply by focusing on one currency pair at a time. You can take a similar approach with futures, but understanding how the futures market work is complicated. Regardless of which option you choose, study, and develop a strategy before you begin to invest.