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Did you know that the forex market is the largest market globally, trading a staggering $6.6 trillion every day?
You’ve probably heard stories of people making a killing trading forex and some losing everything. While this might be discouraging for some, others may resort to stock trading as an alternative to lower their risk.
Foreign exchange trading and stock trading have a lot of things in common. For instance, both are speculative investment options, meaning investment decisions are largely based on speculation, and there’s no guarantee of returns. Despite that, these two forms of trading are fundamentally different, with some people preferring one over the other.
Join us today as we highlight the fundamental differences between forex and stock trading. You can pick which trading option suits you best and invest by trading forex or stocks.
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It is also known as currency trading, FX trading, or foreign exchange trading.
When forex trading, you speculate on whether the price of one currency will rise or fall against the other. For instance, if you think the currency prices of the EUR/USD pair will go up, you buy euros and sell dollars. If your prediction is correct, you’ll make a profit. If not, you’ll incur a loss.
It’s important to note that forex trading doesn’t take place on a centralized exchange like the stock market. Instead, forex trading is conducted Over The Counter (OTC), meaning it occurs between two parties.
There’s no third party like central banks or financial institutions to supervise or interfere with the transaction.
The forex market is open 24 hours a day, five days a week. This is because forex trading happens worldwide in different time zones.
When one foreign exchange market closes, another one opens. This makes forex trading very convenient for traders, allowing them to trade forex pairs in different markets in the world.
On the other hand, stock trading is the act of buying and selling company shares. Company shares represent ownership in that company and are also known as stocks or equities.
When you buy stocks, you become a shareholder in that company. This entitles you to a share of the company’s profits or losses.
For example, if the company makes a profit, you’ll get a share of that profit. Similarly, if the company incurs losses, your losses will be limited to the value of your investment.
Stock trading takes place on stock exchanges like the New York Stock Exchange (NYSE) and NASDAQ. These are centralized exchanges where stocks from different companies are traded. Transactions on stock exchanges are supervised by a third party, usually a financial institution or the government.
Stock trading is conducted during regular business hours, which differ from one stock exchange to another. For example, the NYSE operates Monday through Friday between 09:30 AM and 4:00 PM EST.
Stock trading breaks down into two main types.
Active trading refers to the frequent buying and selling of stocks. This type of trading is usually done by professional traders, like hedge fund managers. Active traders use different strategies to make profits, and they typically have a team of analysts working to assess market data.
Active trading is a high-risk, high-reward type of trading. This is because active traders make a lot of trades, which means they’re exposed to more risk.
On the other hand, active traders also have a higher chance of making more profits.
Passive trading is the opposite of active trading. It refers to the infrequent buying and selling of stocks. Passive traders usually hold on to their stocks for a long time, sometimes even years.
This type of stock trading is low-risk and low-reward. This is because passive traders make fewer trades, which means they’re exposed to less risk. On the other hand, passive traders also have a lower chance of making profits.
Passive trading is a good strategy for investors who want to minimize their risks. It’s also a good strategy for investors who don’t have the time or resources to do active trading.
Now that we know what both forms of trading entail, let’s look at the difference. Despite the minor similarities, forex and stock trading are as different as day and night.
Here are a few differences between the two.
As mentioned above, the forex market is open 24 hours a day, five days a week. This means you can trade anytime during the weekdays, but not on the weekend.
However, different markets have different opening and closing times. For instance, the Tokyo market might be open while the Sydney market is closed. The good news is that when one market closes, another one opens, and some markets overlap.
The stock market is more limited in terms of trading hours. If you want to trade after hours, you can do so through after-hours trading. However, this is usually only available for large, established companies.
As mentioned earlier, the forex market is the largest financial market in the world, with a daily trading volume of over $6 trillion. On the other hand, the stock market only trades about $200 billion daily. But what significance does the trading volume have on these markets?
Well, higher trading volume translates to more trading opportunities for traders. Couple that with a 24-hour market, and it’s easy to see why so many people prefer trading forex.
We already discussed how forex trading happens in an open market with minor regulations. This makes it easier for traders from all over the world to trade currencies freely.
Stock trading has stricter regulations, especially for high-value markets like the NYSE and NASDAQ. While it seems restrictive, it’s important to prevent the manipulation of figures and other fraudulent activities. This is also a way to protect investors.
Volatility refers to the fluctuations in price that an asset experiences in its market. Both forex and stock traders have to contend with considerable volatility in the assets they trade.
The forex market is more volatile than the stock market. This is because forex trading is more leveraged than stock trading. This leads us to our next point.
Leverage refers to the use of borrowed funds to trade an asset. Leverage is common in forex trading because it allows traders to trade with more money than they have in their accounts.
Traders in the stock market can get as much as 2:1 leverage, provided they have a margin account. This means you can borrow as much as twice the amount you want to trade in stocks from the broker. However, note that this is only open to investors with margin accounts.
Forex traders can get leverage by opening an account; there are no special requirements. Leverage limits depend on the trading platform, but some offer limits of up to 50:1. This means traders can borrow as much as 50 times the amount they have for trading.
Liquidity refers to the ability of an asset to be converted into cash quickly and without affecting its market price. The higher an asset’s liquidity, the easier and faster you can convert it to cash.
The forex market is highly liquid because you’re dealing with actual currencies. The stock market is not as liquid as the forex market because it involves buying part of a company.
When you want to convert your stocks to cash, you must find a buyer willing to pay the same price or more for your shares.
While forex and stock trading are profitable, most people gravitate towards forex trading. Let’s look at a few reasons why this is so.
Trading time: As mentioned above, the forex market is open 24 hours a day, five days a week. Anyone from any of the 24 time zones can trade at their convenience.
High liquidity: This means traders can convert the profits from their trade into cash instantly. It’s way better than going through a lengthy process to get your profits.
Low transaction costs: Forex trading has lower transaction costs than stock trading. The transaction fee forms part of the currency value in the form of spreads. Typically, these spreads are low and almost negligible.
Availability of leverage: Leverage allows you to trade much more than what you have at hand. This means you can make a killing, even if you don’t have enough money in your trading account.
Now that you know the difference between these two trading options, the choice is yours. If you’ve decided to trade forex, the best time to start doing so is right now.
Create a trading account with us today and start your forex trading journey.
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