Many people are surprised to learn that Forex trading and stock trading are actually very different. Forex traders do not own the underlying asset, but they speculate on how it will change in value as compared to other currencies or goods. Stock traders invest in a company by buying shares of its stock, which can be bought and sold at any time during the day depending on market conditions and fluctuations.
Forex traders may make money if their currency rises relative to another currency or commodity; while stocks may rise if the company earns more revenue than expected.
The article will explore the pros and cons of both so you can find out what is right for your situation!
What Is Forex Trading
Forex Trading is the act of exchanging one currency for another at a different rate. Foreign exchange is the most liquid market in the world with a volume of around $5,000,000,000 per day. Given that the volume is that high, it brings on a lot of advantages to traders. Usually, higher volumes mean that the orders are executed easier than markets with lower volumes and closed to the target price.
Furthermore, accessing the Forex Market is easier than accessing the stock market. There are a great plethora of investment firms, also known as Forex Brokers, who offer easy access to the Foreign Exchange Markets. Some examples of Forex Brokers are:
Any Forex Trader needs to sign up with a Forex Broker before starting to invest in Forex.
A practical example of forex trading is:
Forex, or FX, refers to trading between two currencies. Any given currency will have an exchange rate with any other currency it can be traded against. Trading happens by taking advantage of movements (changes) in these rates – ie., when one goes up and another down, you make money off the difference.
For example, if USD/GBP was at 0.50 before changing to 0.60 then someone who bought 100 pounds worth of dollars would profit because they could now buy 160 pounds rather than just 110 pounds for their original investment of 120 US dollars.
What is Stock Trading
On the other hand, Stock trading is the process of buying and selling shares in companies on stock exchanges such as NYSEs and NASDAQ. Unlike forex trading, stocks can rise if a company earns more revenue than expected. Investing money into stocks gives investors ownership of that company’s assets – meaning they’ll share in any profits that arise over time.
The volume of the Stock Market is way lower than the Foreign Exchange volume, however, it’s still one of the biggest financial markets in the world.
A practical example of Stock trading is:
For example, you buy 100 shares of Microsoft stock at the price per share is $247. Your shares will then gain or lose value according to a number of factors (i.e.: current news, stability, announcements, etc). The goal would be to sell your stocks when they reach peak worth and turn a profit.
In the case that the price of Microsoft moves up by 10%, your shares will be worth 10% more than the price that you bought them. In other words, your 100 shares are now worth $271 each. Therefore, the difference between the price that you bought the shares at with their current worth is your profit or loss.
In this scenario, you would have made approximately $3000. However, keep in mind that this could have taken months or years to happen as stocks are moving slower than Forex.
What is the difference between forex and the stock market?
The forex Market and stock market share some similarities but they also have many differences. Let’s see the difference in the table below:
|Forex Market||Stock Market|
|Easier Access through Forex Brokers||Not as easy to access and trade as Forex Market|
|Forex Brokers usually don’t charge commissions but they make a profit on the Spreads||Usually, Stock Market Brokers charge fees. The fees are usually charged on a per trade basis.|
|24h, 5 days per week market||8h, 5 days per week market|
|Leverage is widely used which allow you to get started with a lower capital||Leverage is not used in the Stock Market as you are trading on actual markets rather than CFDs of Currencies|
|The Forex Market is more liquid than the Stock Market||Not as Liquid as the Forex Market|
|Forex Markets can be extremely Volatile. While this is a plus for Day Traders or short-term trading, you are still exposed to more risk||The Stock Market usually moves slower than the Forex Market with less volatility. This makes it more suitable for long-term investments|
|Ability to buy or sell the currency through short and long||When investing in stocks you can only buy the stock.|
Should you trade forex or stocks?
Well, this depends entirely on you and your objectives. While forex trading is better for short or medium-term investments, stock trading could be a more approachable option for long term investors.
There is no definitive answer to the question, however, the decision needs to be based on your personal preferences and appetite towards risk.
We believe that using various investment strategies in order to weed out risk is a more prudent strategy than using just one type of investment.