For those looking to trade, there are two large markets available – the stock and the forex market. So, what is the difference between the two? In this article, we take a look at what are the major differences between the two markets.
What is the forex market?
The forex market is essentially the place where all forex trading takes place. It is the world’s largest and most active financial market. One thing that makes it different from most financial markets is that it does not have a central marketplace. Instead, currency trading is mainly done electronically over-the-counter (OTC). This means transactions take place via computer networks among traders around the world instead of on a centralised exchange.
The forex market is open 24 hours a day, five days a week. Currencies are traded in major financial regions around the world, including Hong Kong, London, Sydney, Paris, New York, Singapore, and more. As forex trading takes place over nearly every time zone, the market is therefore highly volatile, with price quotes changing all the time.
What is the stock market?
A stock is a fraction of the ownership of a particular company. Shares are typically issues for companies to raise funds or finance their business operations. The more shares a trader buys, the greater their percentage of ownership. In return, stock traders usually receive dividends on an annual or quarterly basis.
Stock trading is mainly done on the stock market, which is a collection of exchanges that trade different stocks in different companies. Through this particular marketplace, shares can be bought and sold to others. Some of the most promising shares on the stock market belong to well-established and famous companies with large market capitalisation, such as Apple, Amazon, and Microsoft, to name a few.
Differences between stock and forex trading
As a result of their historical volume and volatilityboth the stock and forex market are two of the most popular financial markets that traders can take advantage of. While there are similarities between the two, there are also a few major differences that stand out. Here are a few of them listed below:
Market trading hours
Trading hours are different between the stock and forex markets. As stated above, the forex market is open 24 hours a day, five days a week, as a result of overlapping time zones. This is one of the great advantages of forex trading. On the other hand, stock trading has set trading hours, which depend on the specific region of the exchange.
For instance, the London Stock Exchange (LSE) opens between 08:00-16:30, while the forex market operates between 08:00-16:00 while overlapping both Tokyo and New York sessions. Additionally, a few exchanges are closed during lunch breaks, especially those in the Asia-Pacific region.As a whole, it can be said that forex trading hours tend to be a lot more flexible when compared to those of the stock market.
Volatility and liquidity
Volatility remains a popular topic in the stock vs forex debate. Volatility specifically measures the price fluctuations happening in the market that can either help a trader potentially profit or incur a loss if they are not careful. More specifically, forex traders tend to look for a market that has high liquidity, as this means that a particular asset can be purchased and sold quickly without having much effect on its price. As such, as the forex market focuses on high-volume activities in a short time period, it makes liquidity a lot more effective for forex traders. This is why many forex traders work to open and close positions in a short amount of time, as they intend to potentially make a profit from the small price movements in a very volatile market.
On the other hand, stock traders tend to use the buy-and-hold method, so they may wind up being less comfortable in an extremely volatile environment. As certain blue-chip stocks are known for being very stable in the stock market, traders are more likely to open positions that have the potential to profit in the long term. Therefore, stock traders are not likely to look for short-term price movements, which means a volatile market may not work for their particular trading strategy.
Another difference between stocks and forex trading is the strategies that are available for traders to use. Most forex trading strategies aim to make a profit in a short amount of time, such as swing trading, day trading, and scalping. Regarding stock trading, focused strategies tend to be less common, as stocks are typically traded through long-term positions, while currency pairs are appreciated more by short-term traders in volatile markets. There are also plenty of resources and tips on how to do well in the forex market, such as tutorials, blogs, videos, courses, and articles, which may explain why forex trading is becoming a lot more accessible and popular.
When it comes to forex trading, the use of leverage is something to consider. This is also known as margin trading. For those not in the know, leverage is an investment strategy that makes use of borrowed funds to increase the potential return of a particular trade or investment. This means traders can borrow money from their broker in return for opening a larger trading position, allowing them to amplify their potential profits.
The forex market typically offers a higher leverage of up to 50:1, and in other parts of the world it can be even higher. On the other hand, the stock market is less risky and offers leverage of up to 5:1. While this aims to prevent traders from incurring greater losses if their trades happen to be unsuccessful, there is less for traders to potentially gain.
How does trading forex vs stocks work?
The main reason most people are interested in forex or stock trading is with the potential to make moneyor to hedge a trade. Usually, the tried-and-true method is to buy low and sell high. However, the difficult part is to find the highs and lows. This can be done in two main ways – fundamental and technical analysis.
Fundamental analysis is generally used in businesses, and it takes a holistic approach to determining the value of an asset. For instance, a trader would take a look at the financial performance of a company or instrument, and calculate factors such as equity ratios, net profit, and more.
Micro and macroeconomic factors are also taken into account in order to determine an asset’s potential or future value. Those who are more interested in long-term investors and business may find the stock market more suited for them.
Technical analysis is the opposite of fundamental analysis. It makes use of past data (such as volume or price) in order to predict future price movements. By examining past data, traders are sometimes able to find the highs and lows, so they can sell and buy at the best time to succeed.
While technical analysis is applicable to both the stock and forex market, it is primarily used by forex traders. Those who are interested in data science, pattern recognition, and mathematics may find interest in using technical analysis.
Overall, the Internet has opened the doors for people to participate in a variety of financial markets. The decision to trade currencies or stocks is often based on one’s risk tolerance, convenience, account size, and other factors. On the whole, it is recommended that an instrument a trader chooses should be based on which best fits their goals, strategies, and risk tolerance level.