If you are an investor in the financial markets, deciding between traditions stocks, futures, and forex can be a daunting task. You shouldn't rush your decision before making the FX vs Stock comparison. Whether you are a new trader or looking to switch from the stock market to forex, you need to know what to look for. The purpose of this article is to make a comparison between forex and the stock market with the view of discovering which one among the two promises short-term or long-term success.
What Is Forex Trading?
Foreign exchange, currency trading, forex or FX is the market where people go to trade in the world’s major currencies. Apart from being the largest, the forex market is the most liquid worldover. Every single day, the trading volume exceeds $5 trillion. The market brings together players such as the banks, investors, traders, and brokers to speculate on, exchange, buy or sell currency pairs.
Trading in the forex market is done through a common online platform around the clock for five days a week. Transactions in the forex market involve the buying and selling of any two currencies (currency pairs). Currency pairs usually include what’s called the base currency and the quote currency. For example, in the EUR/USD pair, the base currency is the Euro while the quote currency is the US dollar.
Trades in progress are usually described in terms of 'positions’. When a trader expects a currency they bought to increase value, he or she takes a 'long position’. The trader can then complete the trade by selling the currency for a much higher price. On the other hand, selling a currency with the expectations of a decrease in price is known as a 'short position’. Traders who take a 'short position' later buy back the currency at a lower value.
What Is Stock Trading?
The stock market is basically a platform where buyers and sellers meet to trade in shares issued by companies. It could be a physical location or an online platform. Here is where the prices of stocks are determined through interactions between the buyers and sellers. Physical stock exchanges are composed of floors where traders meet to buy and sell shares. On the other hand, virtual exchanges are computer systems that facilitate the electronic validation and documentation of transactions.
After a company has issued an initial public offering (IPO) the owners of stocks can sell them to potential buyers. As such, companies aren’t regular participants on the stock market, unless they are engaged in rights issues or stock buybacks. When buying stocks on the exchange, traders don’t usually interact with the company involved. Rather, the transaction between the buyer and one of the current shareholders. The same happens when you sell shares.
To make money from stock trading, you may want to buy stocks and sell them at a higher price. That means you have to be patient and only sell when the price is substantially high for you to make a kill. Alternatively, you could hold onto the securities and wait to receive annual dividends and interest. Again, this requires you to be very patient.
FX vs Stock: Different Trading Techniques That Will Impose Long-Term or Short-Term Success
When it comes to the FX vs stock market comparison, the difference between the two is as clear as night and day. The following are some of the points that differentiate FX and stock markets:
Stock trading has leverages of up to 2:1. Before you can make use of the available leverages, you must meet some conditions such as owning a margin account. However, that isn’t something that every investor qualifies for.
Forex trading is a little bit different, given that just about anyone can qualify for the available leverage. All one needs is to sign up for a forex trading account. While the leverage is 50:1 in the US, it is as high as 400:1 in different jurisdictions.
2. Paired Trades
In foreign exchange, currencies are quoted in pairs. As such, it is important to take into account the economic performance of the countries to which both of the currencies belong. Factors such as the political environment, growth in GDP, and growth in employment figures are important. It is different for the stock exchange where the performance of a company and the local economic situation is all one has to consider. When it comes to sensitivity, forex markets are more reactive than stock markets.
3. Liquidity Differences
In the stock market, shares can cost up to a few hundred dollars with prices fluctuating on the basis of the forces of demand and supply. Forex trading is a totally different ball game. Due to the liquid nature of the market, single trades could involve lots of cash. The clear winner of the liquidity contest is the forex market.
4. The sensitivity of Prices to Trade Activity
When a trader buys a substantial number of shares, it could greatly impact the stock prices, especially if the corporation is small. For instance, buying over 10,000 shares at a go could lead to a spike in the stock prices. The forex market is not as sensitive, given that it would take the exchange of more than 100 million of a major currency to impact the price.
5. Forex Trading Has No Bear Markets
The forex market is interesting in the sense that you can make money whether there is a spike or decline. During a decline, all you need to do is take a short position’. In theory, it is possible to perpetually avoid losses. This isn’t possible in the stock market, especially if there is a prolonged bear run.
6. Freedom from Regulation
Many of the major securities exchanges are known to impose all sorts of limits and regulations on company stocks. Not so for forex trading, which is largely unregulated. While regulation protects investors from fraud, some of the limits imposed by the exchanges can make stock trading untenable.
Between forex trading and stock trading, which one is great to invest in? It seems that the forex market is a good place to put money if all you want is short-term trading. It is possible to make money by taking advantage of the daily changes in forex prices. The stock market is good for long-term investment. You can either make money by selling your shares at a higher price or waiting for dividends paid at the end of every trading period.