Forex vs. Stock Trading
Nowadays traders have access to a growing number of trading instruments, from FAANG (Facebook, Apple, Amazon, Netflix, and Google) stocks to the fast-paced world of forex.
Choosing between which of these markets to trade can be complicated, and a lot of factors should be considered to make the best choice.
Therefore, it's essential to know the difference between the two markets and which one you should opt for trading.
If you are a newbie looking to start your trading journey, this guide will help you.
Correlation between forex and stock markets
Forex and stock markets, in particular, have been known to correlate for multiple stock market indexes and corresponding exchange rates.
For example, before the 2008 global recession, investors found a correlation between the Nikkei stock index and the USD/JPY currency pair. As the Nikkei fell, investors interpreted it as a sign of weakness in the Japanese economy, and the USD strengthened against the JPY.
This is referred to as an inverse correlation. If the roles are reversed, and the Nikkei rises in value, the yen rises in value against the USD.
Many stock and forex traders may use these correlations to forecast future price movements when opening positions in both markets. Despite major differences, forex and stocks often work well together when analyzing technical trading trends. However, market forecasts are not guaranteed, and due to the uncertainty of forex market, correlations of stock vs. forex can unexpectedly shift with no indication of which way the markets are headed.
Let's find out the key differences between forex and stock market.
1. Market open time
Thanks to time zone overlap, forex market is open 24 hours a day, five days a week. This is one of the benefits of forex trading over stock trading.
Stock market is restricted to the opening hours of the exchange. For example, in the United States, most stock exchanges open at 9:30 a.m. EST and close at 4:00 p.m. EST.
As a result, forex trading hours are much more flexible than stock market, and there is undoubtedly more time to spend trading forex.
2. Trading volume
The size of forex market is one of the most significant differences between forex and stocks. Forex market is estimated to trade about $5 trillion every day, with the majority of trading focused on a few major pairs such as the EUR/USD and GBP/USD.
In comparison, stock market from around the world gets a daily turnover of $200 billion only. Having such a large trading volume will provide traders with many benefits. When there is a lot of activity, traders will usually get their orders filled more quickly and at the rates they want.
3. Short selling
When stock market falls, you can profit from shorting it, but this carries additional risks, one of which is that you can experience unlimited losses. In fact, that is unlikely to occur. Your broker will eventually close short positions.
In currency markets, unlike stock market, there are no restrictions on short selling. There are trading opportunities in currency markets regardless of whether an investor is long or short or which direction the market is moving.
4. Liquidity
A market with a high volume of trades usually has a high level of liquidity. Liquidity contributes to tighter spreads and lower transaction costs.
When you buy stocks, you purchase shares of companies that can range in price from a few dollars to hundreds of dollars. The market price is affected by supply and demand. Forex trading is a different world.
Despite fluctuations in a country's currency supply, there is still a significant amount of currency available for trade. As a result, all major world currencies are extremely liquid.
5. Regulations
The vast scale of forex market reduces the risk of any fund or bank owning a specific currency in currency trading.
For the major currencies, forex market is so liquid that substantial intervention by any single party is all but unlikely.
A plethora of rules and regulations govern stock trading on major exchanges. The regulatory climate of the major stock exchanges creates constraints that you do not notice.
6. Commissions
Most forex brokers do not charge commissions; instead, they make their money on the spread, which is the difference between buy and sell prices.
When trading equities, futures contracts, or a major index such as the S&P 500, traders must always pay the spread as well as a broker fee. However, a lot of online stock brokers now offer zero commissions, so this is now less of a factor.
7. Leverage
Traders with a margin account can use up to 1:2 leverage in stock trading. Intraday traders who open and close their positions in a single day, on the other hand, will trade up to 1:20 leverage if their account balance is greater than $25,000.
There are also certain prerequisites that must be met before you can do this. Not every user can be approved for a margin account, which is required for leverage stock trading.
Forex trading is a unique experience. To be qualified to trade with leverage, you must first open a forex trading account. There are no qualification criteria, and you can leverage up to 1:500.
8. Trading strategies
Another key difference between forex and stocks is the abundance of tools and strategies developed for forex traders.
Many forex trading strategies, such as day trading, swing trading, and scalping, seek to make a profit in the short term. Day trading in particular, as well as swing trading securities, can be extended to other markets, including stock market.
However, strategies for stock trading are less common, owing to the fact that stocks often apply long-term positions and are often valued more by short-term traders in volatile markets.
The availability of resources and tips on how to succeed in forex market can contribute to forex trading's advantage over stock trading.
9. Simplicity
There is no battle between forex and stocks in terms of simplicity. This is due to the fact that the eight major currency pairs account for the vast majority of the market share. In comparison, the NYSE alone has over 5,000 listings!
forex market helps traders to concentrate on fewer trading instruments while still having access to a large number of trade setups.
10. Market influence
Another factor to look at when comparing forex and stock markets is what triggers price volatility. Both markets are primarily affected by supply and demand, although there are several other factors that can cause price movements.
In forex market, you should typically understand the country's macroeconomics, such as inflation, GDP, as well as news and political events. In addition, since you are actively purchasing one currency and selling another, you must analyze all pairs.
When trading stocks, you can concentrate on a few indicators that have a direct effect on the business you want to invest in, such as debt levels, cash flows, and profits, economic statistics, news releases, and company performance, among others.
When you buy Amazon stock, for example, your primary concern is whether stock will rise in value; you are less worried about stock prices of other companies.
So, who's the winner?
All external variables, such as trading personality, risk tolerance, and overall trading objectives, should be considered when selecting a financial instrument or market to trade.
Forex is arguably more lucrative than stocks if your aim is to make small, regular gains from price fluctuations using short-term strategies.
Forex market is more volatile than stock market, where an experienced and disciplined trader can easily benefit. However, forex has a much higher degree of leverage, and fewer traders prefer to concentrate less on risk management, making it a more dangerous investment with potentially negative outcomes.
If you want to take a buy-and-hold strategy for long-term positions, stock market is a safer option. The fact is you can make money trading both stocks and forex, using different strategies and exercising patience.
Ok, it was a lot to absorb, so let's spool back:
Key takeaways
- Whether you invest in forex or stock market is determined by your risk tolerance and trading style.
- Before jumping in, you should consider factors like volatility, leverage, and market trading hours.
- In general, stock market suits a buy-and-hold investor, while aggressive traders often favor the fast-moving forex.
Bottom line
If you aren't available during regular market hours due to your job or business, forex is the best option.
On the other hand, stocks are a practical option if your market strategy is to buy and keep for the long term, producing consistent growth and collecting dividends.
The battle between forex and stock has been going on for a long; however, because of forex's relative freedom of regulation and a high degree of potential leveraging, it is possible to take large trades with a small amount of capital.
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