There are certain things you need to understand when it comes to investing and trading forex vs stocks. You can check out our guide here to learn more.
The financial market is a gold mine for people who understand the ins and out of stock and forex trading. While the financial market denotes a marketplace for all types of assets, forex and stocks are the most popular assets that people deal with.
The basis of both forex and stock trading is to profit off of constantly changing prices. Though somewhat similar, both terms denote totally different trading activities. The difference between forex vs stocks isn’t just in the assets that you trade; it’s actually more complicated than that.
The forex market is a vast market that trades about $5 trillion each day. Most folks are flocking to the forex market to get themselves a piece of the pie. The stock market also amasses a huge following, but not as much as forex.
In this piece, we’ll highlight the major differences between foreign exchange and stock trading. That way, you can have a firm understanding of both before venturing into whichever.
Is Forex and Stock Trading Related?
Stock trading premises on buying and selling company shares, while forex trading involves buying and selling different currencies simultaneously. Both activities leverage shifts in the assets’ prices to sell previously bought shares or currencies at higher prices.
Most stock traders use forex trading as a tool to help make profitable decisions when trading stocks. Both of these trades require a comprehensive understanding of their respective markets and a lot of practice for you to profit from the trade.
Forex Vs Stocks: The Key Differences
We’ve already established that many aspects of forex and stock trading are starkly different. To give you a firm understanding of how these financial markets are different, here are the major differences between stock trading and foreign exchange.
The reason why lots of traders flock the forex market is because of the greater amount of leverage when compared to trading in stocks. The higher leverage makes forex trading incredibly promising, while it means there are also greater risks to the trade.
Stockbrokers must have about 2:1 leverage, which is about 50% the value of the stocks they deal in. Forex traders, on the other hand, operate at a 50:1 leverage. That means they only need a 2% value in cash of the currency they trade.
Difference agencies are responsible for regulating these two types of trade. The Securities and Exchanges Commission (SEC) oversees all trading of stock options. The Commodities Future Trading is the body responsible for all forex trading activities in the country.
Trading regulation isn’t about putting caps on your trading activities or the government monitoring your trading income. These regulatory bodies are out to prevent any fraudulent traders that are rife in financial markets. In doing so, they engender a conducive environment for traders countrywide.
Generally, forex trading has greater freedom from regulation than stock trading, which is both a good and bad thing. The greater freedom means there are no limits that can cap your profits, but it also means you’re less protected from fraudulent dealings.
Forex typically has lower spreads than when you trade stocks. Spreads are the differences between bids and ask prices.
Forex involves some of the world’s major currencies like the USD, GBP, and CAD. Because of the large volume of these currencies traded every day, you can expect low trades with forex trading.
However, it isn’t uncommon for large global companies like Apple to have tight spreads, but companies with tight spreads are pretty rare in stock trading. You’ll find that over time, it’s much cheaper to trade in forex because of the tight spreads.
- Size of the Market
Forex trading operates on a global scale for the mere fact that it deals with international currencies. This doesn’t mean that companies restrict stock trading to their countries. It’s just that much of the stock trading takes place within the country rather than on an international frontier.
The forex market is open 24 hours a day, as you can see from this forex chart, which makes it ideal for traders worldwide to make their trades regardless of the time zone. Forex trading mainly revolves around a few major currencies, while stock trading involves thousands of different kinds of stock.
Most stock traders trade within a short market period, mostly between 9:30 am to 4:00 pm. You may trade outside this period, but there are a lot of hurdles like unpredictable volatility and price issues that make it an unwise move.
On-the-other hand, the forex market is open 24 hours a day, six days a week. However, despite the greater accessibility of forex markets, trading up to six days a week isn’t the easiest thing on earth.
- Different Liquidities
The major world currencies are more liquid as compared to company stocks. Company stocks are liquid and can shift from just a few dollars to a hundred dollars with time as per the demand and supply. However, you can’t compare this to the shifting value of the major currencies.
- Sensitivity to Trade
Trading vast amounts of shares may significantly impact the stock prices of a company, especially if it’s a small company. While even when a currency trades in the hundreds of millions, there’s very little impact on the currency’s market price.
- Market Catalysts
Each market has different catalysts that impact the price of the assets. Global events directly impact currency prices, while the most significant influencer of stock trading is business events. Although global happenings also affect stock prices, they do it only to a minor extent.
Large scale economic shifts affect both markets, but the forex market is most affected by global events. Traders must thus keep an eye out for any major occurrence that may affect their respective markets.
Trade in Whatever You’re Good at
If you’re still stuck on choosing between forex vs stocks trading, hopefully, this piece helps you make a more informed decision. As mentioned above, both trades require extensive knowledge of the markets and lots of practice to perfect.
Trading in both isn’t impossible, but it’s extremely difficult to pull off, especially if trading assets is a side hustle. Regardless of the asset you settle on, you can always make a killing with lots of commitment and the right attitude.
For more informative reads, be sure to check out our other articles.