The reality is that there’s no definite better choice, and your decision should be based on the trading type that’s more suited to your goals and trading style. In this guide, we’ll cover an overview of forex investment and stock trading, and we’ll detail how they differ.
Forex trading involves simultaneously buying and selling two currencies whereas stock trading involves buying and selling shares of individual companies. The mechanisms underlying these two forms of trading are very different and are advantageous in different situations.
Although forex and stock trading are marked mostly by their many differences, they also share some similarities.
Let’s now take a more in-depth look at how the forex market compares to the stock market.
With a daily global trading volume exceeding $6 trillion, the forex market is the largest financial market in the world. The stock market is immensely popular but it only has a daily global trading volume of $84 billion. Market size matters in trading because of the greater the market size, the greater its liquidity.
Liquidity is important because it makes it easier to trade an instrument. For instance, due to the forex market’s high liquidity, you can make profits by short selling in a falling market. On the other hand, stock trading generally works best in rising markets because the stock market has low liquidity which makes it hard to short sell in falling markets.
Note: Large popular stocks can also be very liquid because they have many shares available. However, once you move away from blue chips stocks become significantly less liquid.
One of the advantages in favour of forex trading is the superior leverage offered by forex brokers. Common leverage levels include 50:1, 100:1, or 200:1 with some brokers going as high as 500:1. With a 500:1 leverage, a trader needs only have 0.2% of the value they want to trade in their account.
This is in contrast to the 2:1 leverage which is common among stockbrokers. Some stockbrokers go up to 50:1 leverage but a trader will still need 2% value of the stocks they are trading in their account.
Note: The high leverage which can make forex trading lucrative can also make it very risky – the bigger the gains you can get, the bigger the potential losses as well.
Approximately 630,000 companies are now being traded publicly all over the world. With thousands of potential stocks to choose from, you will probably find it harder to track the stock market compared to the forex market.
Most international forex brokers will offer you between 40 and 70 currencies, however, there are only 18 common currency pairs that represent the majority of the trading volume in the forex market.
Stock markets are available during stock exchange hours, and several major exchanges including the NYSE and NASDAQ have introduced some extended trading hours. The catch, however, is that extended trading sessions are generally characterised by low trading volumes and low liquidity.
Forex market sessions are technically restricted to business hours like the stock market, however, there are multiple markets all over the world in different time zones and so traders can participate in the markets 24 hours a day. The market only stops over weekends and holidays, but with the moving time zones, even these days are squeezed tighter, almost making forex a 24/7 market.
One drawback of the forex market operating 24 hours is that the market is still changing even when you are not actively trading and you may have to work at odd hours to realise certain trades.
Forex prices are predominantly affected by global news, exhibiting sensitivity to emerging political and economic situations in other countries. You’ll need to keep up with macroeconomic issues like GDP, regional employment growth, and political prospects.
Stock prices may respond to large-scale movements in macroeconomic conditions, but they normally respond to news or earnings reports about the company’s underlying stock or the sector the company is in. Knowledge of metrics like a company’s cash flow, profitability, and debt is essential.
Forex brokers typically charge no commission, making their margin on the spread instead. Forex majors normally have extremely low spreads and transaction costs because high liquidity tends to equate to tighter spreads and lower transaction costs.
Exotic currency pairs are far less liquid and so they have higher spread and higher transaction costs compared to major and minor pairs. Similarly, the stock market has lower liquidity, resulting in higher transaction costs. Stock traders have to pay both the spread and commission to a broker.
Stock trading on all major exchanges has many regulations and limits but forex trading is a lot less regulated which has both positive and negative effects. The major stock exchanges may impose some unwelcome limits but this protects you to a degree that trading with some forex brokers doesn’t. However, this is where your due diligence pays off when choosing a regulated broker.
Some traders choose to trade both forex and stocks but if you have to choose one, it all comes down to your knowledge of each market, your goals, your trading style, and risk appetite. Both markets offer diverse investment opportunities with different perks and risks, so you have to choose what works best for you.
Whichever market you choose, you’ll be able to trade with FP Markets. They offer the ability to trade forex, stocks, and a wide range of other financial instruments with advanced trading technologies.
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