Penny Stocks vs. Forex

If you’re currently doubting that penny stocks and forex have much in common, you’d be pretty much dead-on, as they’re two completely different asset classes. However, the common denominator there is this: if you don’t have a lot of investment capital (as in, you’re not exactly hedge fund material), both penny stocks and forex might appeal to you.

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What Are Penny Stocks?

Penny stocks typically trade for under $5 per share. Most penny stock companies are companies that haven’t achieved much notoriety and traditionally have small market capitalization.

Those two factors make them highly speculative, which equals high risk for traders. Penny stocks are quoted over-the-counter, such as on the OTC Bulletin Board or “pink sheets” and can also trade on securities exchanges, including foreign securities exchanges.

How to Invest in Penny Stocks

If you’ve decided you’re game to try penny stocking despite its highly speculative nature, do your research of the penny stock companies you’re interested in, then:

1. Choose a broker.
2. Determine which stock to trade; a good starting point is to use tools from the OTC Markets website or Finviz. The OTC Markets Group also organizes securities into tiered marketplaces that can help you determine which stocks to trade.
3. Start by paper trading for a reasonable amount of time so you gradually build more confidence with real money.
4. Begin trading, but be sure you’re comfortable with losing money on some (or potentially all) of your trades, particularly when trading on margin.
5. Get a mentor who trades penny stocks.

What is Forex?

The market participants in a forex market include traders, investors, governments, banks, businesses and more. The market is open 24 hours, five days a week. When you trade forex, you simultaneously buy and sell currency pairs. The most often-traded currency pairs include:

• EUR/USD: The euro and the U.S. dollar
• USD/JPY: The U.S. dollar and the Japanese yen
• GBP/USD: The British pound sterling and the U.S. dollar
• USD/CHF: The U.S. dollar and the Swiss franc

Notice that all pairs include the U.S. dollar. (If you don’t see USD on the list, it’s not a major currency pair, and is instead called a currency cross.) Examples of these can include, but are not limited to, euro crosses and Japanese yen crosses:

When trading forex, you sell one currency (the base currency) in order to purchase another (called the quote currency). The base currency and the quote currency are both always in flux. The exchange rate shows how much you’ll pay in units of the quote currency to buy one unit of the base currency. When you sell, the exchange rate reflects the number of units of the quote currency you will receive for selling one unit of the base currency. Here are a few other terms to know:

Going long: You buy the base currency and sell the quote currency.

Going short: You sell the base currency and buy the quote currency.

Bid-ask spread: The difference between the price at which a dealer will buy and sell a currency.

Bid price: The amount of money a dealer is willing to pay, or “bid” for a currency.

Ask price: The amount of money a dealer wants for a currency.

Price interest point (pip): The measure of the movement in the exchange rate in a currency pair.

Costs of Penny Stocks and Forex

In order to trade forex, you’ll need to open a trading account with a forex broker. Similarly,  penny stocks don’t require any set fees, trading costs or account minimums. There are no rules about how much a broker can charge you, so it’s important to shop around and compare amounts and services.

Regarding forex, some firms charge a per trade commission, while other firms make their money on the spread between the bid and ask prices. Note that some forex firms advertise “commission-free” trades, but understand that through the bid/ask spread, they’re still making money off your trades.

Here’s a quick example from TD Ameritrade listing the fees involved, and it’s a great example of how to search costs:

How to Choose a Forex Broker

Choosing a broker can be such a personal decision; it doesn’t really matter which one your friend uses or even a certain professional trader uses. If a particular broker works best for you, then go with it!

A broker should provide you with extensive research and analysis, competitive trade prices and educational material, including a practice account that helps you learn the ropes.

Last but not least, it’s important to have a top-notch trading platform with a full suite of tools (that you’re comfortable using, of course). Benzinga's favorite brokerages to trade penny stocks and trade forex are below. Check out the full Best Online Stock Trading Brokerages rankings and Best Forex Brokers rankings for a more detailed review.

Final Thoughts on Penny Stocks vs Forex

As you can see, penny stocks and forex have hardly anything in common. However, they’re both risky in their own very specific ways. The penny stock market is risky because it’s highly speculative, as mentioned above. On the other hand, the forex market is risky because of the amount of leverage potentially involved. You’re typically required to put up just 1% in margin of the total value of a forex contract.