Forex Trading vs Stock Trading – Find Out What’s Best for You
I’ve got a handful of experience in both trading markets; forex and stocks. Now when my friends ask me where to put their investments, I don’t pick either. Instead, I tell them the difference between forex and stock markets. Simply because some people may wait for several years to see their stocks skyrocketing, while some people want to make some quick bucks daily in the forex market.
If you want to find out which trading market will suit you the best, read on:
Difference Between Forex and Stock Market
The fundamental difference between forex and stock markets is what they operate in.
Starting with the Foreign Exchange or Forex market, you’ll find various currency pairs here. From the U.S. dollar to Great Britain pound, the Euro, and South African Rand, most global currency pairs are listed in the forex market. People buy or sell these currency pairs in the forex market and make a profit based on the price difference.
Forex market also lists commodities like oil, gas, gold, silver, and more. People buy or sell these commodities and make a profit.
On the other hand, in terms of stock, companies put their shares (unit of ownership) in the market to attract investors. When you buy a stock, you purchase a small unit of a company and become a shareholder. For as long as you hold the stock, you remain a shareholder.
Most companies pay dividends to shareholders and people usually hold stocks for a long period to maximize their profits. However, if a shareholder thinks that a company’s stock won’t go higher, then they can sell those shares to earn a profit.
While this is a fundamental difference between forex and stock markets, I’ll discuss some more differences below:
Volatility
In trading, volatility defines how quickly the market fluctuates. Also, more volatility indicates more opportunities to earn profit quickly.
The forex market is more volatile as compared to the stock market and it is because of liquidity. The forex market has a liquidity of $7.5 trillion. As more and more people engage in the forex market, it becomes more volatile.
On the other hand, the stock market is less volatile and a company’s stock may not fluctuate for days. This is why people with unreal holding power opt for stock trading.
While volatility provides more opportunities to make a profit, it also translates to a great risk of losing money because traders may not understand the market’s movement. Here, I’d advise traders to stay active and use an ever-available connection like Spectrum Internet service for seamless connectivity. Also, use stop loss or stop orders on their trades. This way, a stop order will automatically close their trade as soon as the market touches a certain point to minimize their losses.
Trading Hours
One of the biggest advantages of the forex market is that it’s active 24 hours from Monday to Friday. The reason why the forex market doesn’t close on weekdays is because 4 major financial markets, having different time zones operate in the forex market. These markets have different sessions and based on their opening time, they’re named as; the Sydney session, Tokyo session, London session, and New York session. Some of these sessions overlap. For instance, Tokyo and Sydney sessions overlap for a few hours which is another reason we get to see high volatility in the forex markets.
On the flip side, stock markets around the world operate for certain hours on weekdays. This surely hinders the ability of stock traders to make more profit.
Market Dependence
The basic principle behind forex and stock market is the same: supply and demand. Whenever there is more supply than demand, the price of currency pairs or the company’s stocks dives and vice versa. However, multiple factors influence the supply and demand in forex and stock markets.
In forex trading, there are a lot of other factors you need to keep an eye on. A country’s macroeconomic factors that keep its currency afloat are important. For example, GDP, unemployment rate, major national and political events, inflation rate, and more. So, as a forex trader, you need to keep an eye on all these things.
In stock trading, there are a few factors that you should know of. Unlike the forex market, you don’t need to keep an eye on the company’s macroeconomic factors. Rather, you should be informed about a company’s financial statements, cash flows, debts, health of the sector it operates in, and its future goals. This way, you can predict if a company’s stock will go upwards or downwards and make an informed financial decision.
Key Takeaways
- In the forex market, you trade in currency pairs and commodities; you buy or sell a company’s stocks.
- The forex market is more volatile than the stock market. One main reason behind this volatility is the number of people engaging with the forex market daily.
- The forex market operates around the clock on weekdays. Stock markets have limited hours of operability while both markets are closed on the weekend.
- Both markets have the same basic principle of supply and demand. However, forex has a lot of secondary factors such as mention them as compared to stocks.