Forex and stocks are two of the most popular global markets. When getting started with trading, it is important to know which one is the best suited to you. Make sure to keep reading below to better understand this topic.
What is the forex market?
The forex or foreign exchange market is a marketplace where currencies can be bought, sold, and exchanged. The participants in this market range from individual retail traders, banks, financial institutions, and even travellers in need of local currency.
The price at which market participants buy or sell currencies is usually determined by their exchange rate, which is the value of one currency in terms of another. Basically, it is how much of one currency a trader needs to buy one unit of another currency.
The forex market’s most unique aspect is that it lacks a central marketplace. Instead, forex trading is conducted electronically over-the-counter (OTC). This means that all transactions occur via computer networks among traders worldwide rather than on one centralised exchange.
The forex market is open 24 hours a day, five days a week. Currencies are traded worldwide in most major financial centres, such as Singapore, Hong Kong, Tokyo, New York, Paris, London and more. As such, the forex market can be highly active at any time, with price quotes changing constantly.
What is the stock market?
Stocks are an investment in a particular company. A stock in itself represents the ownership of a piece of that company’s assets and future earnings. When a trader buys a stock, they are actually buying a small piece of that company and can enjoy potential profits if the company becomes more valuable in the future.
There is a difference between privately owned stocks and publicly traded stocks. Stocks that are publicly traded exist on an exchange, for instance, the New York Stock Exchange (NYSE) or the NASDAQ. This is when a company has made itself publicly available.
Privately owned stocks follow the same logic, except that they are not part of an exchange. Therefore, they can be more volatile, considering they are often for startups and companies that have not been listed. Each investment also must be approved by the issuing company. There are also cases where private stock is offered to employees in startups and can often be used as compensation if cash flow is insufficient to pay wages at the beginning.
Difference between forex and stocks
The largest difference between the stock and forex markets is what a trader is trading. Forex is a marketplace for the buying and selling of currencies, while the stock market deals in shares – units of ownership in a company. Primarily, a trader’s decision about whether to trade currencies or stocks should be based on which asset they are interested in trading, though there are some other factors to consider.
Market trading hours
The opening hours of a market can have a significant impact on a person’s trading, as this can influence the time needed to spend monitoring the market.
As forex is a completely global market, traders can trade 24 hours a day, five days a week. This provides them with more opportunities to trade but also creates the risk of the market moving while traders are not around to monitor it. If a trader decides to trade forex, it is important to create a risk management strategy with appropriate limits and stops to protect trades from unnecessary losses.
The best time to trade forex is when the market is the most active, which is usually when two sessions overlap. This is because there will be a higher number of buyers and sellers. For instance, if someone is interested in trading GBP/USD, London and New York trading hours overlap between 12 pm to 4 pm (London time). As such, the increased liquidity will speed up transactions and even lower the costs of spreads.
Share trading is slightly different, as it is often limited to the opening hours of whichever exchange the shares are listed on. That said, increasingly extended hours are being offered to traders, which means they can act quickly on breaking news, even when the market is technically closed.
Liquidity
Liquidity refers to the ease at which an asset can be bought or sold in a market. It is an important consideration because the higher the volume of traders, the more money there is flowing through the market at any time. This makes it easier for traders to find someone to take the other side of their position.
Forex is the largest and most popular financial market in the world. This means it is extremely liquid and frequently sees a daily turnover of trillions of dollars.
Market liquidity can fluctuate throughout the day as different sessions open and close around the world, but it also varies greatly depending on which forex pair a person chooses to trade. In fact, just eight currency pairs account for the majority of the trading volume. For example, the dollar is involved in almost 75% of all forex trades.
On the other hand, the stock market sees comparatively fewer trades per day. But shares are still easy to access and trade. Large, popular stocks such as Microsoft, Apple, or Facebook, are the most liquid as there are usually willing buyers and sellers. However, once traders move away from blue chips there is often significantly less liquidity.
Volatility
Volatility measures how likely it is that a market’s price will make major, unforeseen price fluctuations. A market with high volatility will see its prices change quickly, whereas markets with low volatility tend to have more gradual price changes.
The ease at which forex can be traded makes it extremely volatile. Though the market often trades within a small range, the vast number of trades taking place in the market can cause prices to change very quickly. When trading forex it is important to keep up to date with economic, social and current events, as the market is prone to sudden and drastic movements in response to these announcements.
The stock market tends to have more stable price patterns that traders can track over time. Like forex, it can see periods of volatility. Overall, trading volatility can potentially provide a lot of opportunities for traders to take advantage of, but it also comes with increased risk, making it important to take steps to prevent any unnecessary loss.
Leverage
Trading on leverage allows traders to gain exposure to markets with just a fraction of the capital normally required. Leveraged products can be used to trade on margin across a range of markets.
While it can be an advantage of both share and forex trading, it is more commonly cited as a feature in forex trading. Forex trades usually have a much larger leverage ratio – in some countries, it can be as much as 200:1. That said, leverage is a double-edged sword, though it can potentially magnify returns, it can also amplify losses.
Which one is right for you?
When it comes to deciding whether to trade forex or stocks, there is no definitive answer because there are benefits and limitations to each market. Ultimately, your decisions will have to come down based on personal preferences and attitude towards risk.
When making your decision, be sure to take into account your trading style and financial goals. If you are interested in trading in a fast-paced environment, forex provides plenty of opportunities for short-term traders. On the other hand, if you are looking for something with less volatility, the stock market could be a better choice.