In forex, currencies are exchanged against each other 24 hours a day, 5 days a week across a global network of traders, commercial companies, brokers, central banks, and banks. To put it simply, forex trading involves the buying of one currency and the simultaneous selling of another. In this act of buying and selling, the traders earn by speculating on the exchange rate between them.
On the other hand, the stock market is the combination of markets where pieces of ownership in business, called stocks are bought and sold. On buying the stock of a company, the trader becomes a shareholder of a company. In contrast to the forex market, the stock market is conducted on regulated exchanges, like the London Stock Exchange, NYSE (the New York Stock Exchanges), and the NASDAQ which provide a platform for trading shares of the publicly listed companies to the traders.
Both these markets are quite popular trading markets in the financial world. However, traders often find it difficult to choose the one that suits their trading style. Below, we have explained the major differences between the two markets, helping traders to know how forex markets are different from the stock market and understand which one is better for them.
Forex Market vs Stocks Market
The major differences between the foreign exchange market and the stock market are explained as under-
Trading Volume
The significant difference between the two markets lies in the size of these markets.
The allure of trading a variety of currency pairs, i.e., major, minor, and exotic currency pairs 24 hours a day makes it attractive to traders of all levels. The stock market also provides traders with ample opportunities, however, it does not pass the forex market whose trading volume is $6 billion per day. In the stock market, traders can find thousands of shares in automobile, pharmaceutical, and technology industries including both penny and clue-chip stocks.
Though there are a lot of stocks to trade in the stock market, traders usually see the forex trading over stock trading as traders prefer to hold positions for a small number of top forex currency pairs over deciding to trade on new, existing, or emerging stocks for potential gains.
Stocks are traded popularly over the forex through ETF trading, i.e., investment funds that hold collections of the underlying assets and work in a way like the stocks giving partial ownership of the stock. Apart from ETFs, the stocks are also traded as CFD stocks and spread bets.
Volatility and Liquidity
Market volatility refers to the measures of fluctuations in the assets’ price within the financial market. Traders capitalize on these price fluctuations to gain profit in both markets, however, a lack of understanding of the factors impacting these financial markets can lead traders to incur a loss.
In the forex market, traders seek higher liquidity, allowing them to buy and sell the assets without having a major impact on their prices. Consequently, in forex, short-term traders are more likely to gain benefits at times of high market volatility. By opening and closing the positions for a short period the traders can execute the trades with precision.
Conversely, traders aiming for the trade-and-hold method for the long term may find it hard to gain benefits in volatile market conditions. However, this type of trading is more relatable to the stock traders. In the stock market, traders choose the blue-chip stocks for their higher stability. Such stocks are less susceptible to short-term price fluctuations, thereby supporting a consistent trading strategy over time.
Margin Rates
When weighing up the forex market with the stock market, one considerable factor is the ability of the forex to trade on leverage, also called margin trading.
Opening a spread betting or CFD trading allows traders to place a trade by holding a smaller percentage of the full trade value, i.e., a deposit. In forex as well as stock trading, the traders have the exposure to trade on margin allowing them to magnify their profits. However, trading on leverage can also magnify the losses.
Usually, in the forex market, traders are offered much lower margin rates that start around 3.3%, or in terms of leverage, it can be equivalent to 20:1. Conversely, in the stock market, traders have a lower risk of losing the capital as it offers the margin rate starting from 20% or a leverage ratio of 5:1.
Trading Strategies
A wealth of resources and trading strategies are created for traders looking to trade in the forex market. Some of the prominent forex trading strategies like day trading, scalping, and swing trading are quite popular among traders as they aim to gain profit in a short time. Conversely, in the stock market, there are less decided strategies that are being followed by long-term traders.
Forex or Stock Market? Which one is better for you?
It can be said that the advent of Internet technology in the financial world has opened plenty of opportunities for traders and investors looking to earn a profit. However, the decision to choose the right market to trade depends upon a lot of external factors like overall trading goals, risk tolerance, and personality type.
If you are someone who is focused on making small and quick profits and uses short-term strategies, then choosing forex over stocks can be a better choice for you. On the other hand, if you want to have the safer option, and want to buy and hold a position for the longer term, then stock trading can be a better option.
But remember, trading involves risk and must be proceed with proper knowledge.