The term itself—forex trading or stock trading—is highly individualised and subject to change depending on the person discussing the topic. The fact that both the terms are financial markets is their key point of commonality. But it's obvious what the distinctions are. While assets involve buying and selling shares of various companies, forex involves exchanging currencies. Both of them are utilised in the market by traders to produce payouts and by different businesses to raise money for upcoming projects. Tools, terminologies, reactivity to news and modes of market participation are a few more areas of similarity.
Both forex and stocks have transitioned to a digital platform, and traders who speculate from home or a specialised office utilise them most frequently. Regarding the distinctions, there is always the question of how much more money is traded on the online forex market than on the stock market. Data indicates that the volume of the fx market is close to $7 trillion, while the volume of the stock market lags somewhat because it is not a single market. You see, stocks are sold on exchanges where the corporations register and sell their shares, whereas fx is typically handled through brokers and banks.
Let's simplify each aspect of trading and understand what are the elements that we need to consider before understanding which one is better for you.
The foreign exchange market, often known as forex, is a network of buyers and sellers who exchange currencies at a price that has been predetermined by the market. Therefore, the act of exchanging one currency for another is referred to as foreign currency trading. Participants in this process include individuals, corporations, and central banks.
While some currency conversion takes place for useful purposes, the vast majority of currency exchange takes place with the intention of making a profit. The amount of money that is traded from one country to another every day causes the price of certain currencies to be subject to significant swings. Traders are drawn to the foreign exchange market due to its high degree of volatility.
Trading foreign currency, as opposed to equities or commodities, takes place not on exchanges but rather directly between two individuals in a market known as an over-the-counter market (OTC). A worldwide network of organisations centred in the four main forex trading centres of London, New York, Sydney, and Tokyo oversees the foreign exchange (FX) market. These cities are located in different time zones. Due to the absence of a single centralised location, foreign exchange trading is open around the clock, every day of the week.
Forex trading expenses might be quite minimal (brokerage and commissions). In reality, there are no commissions; rather, the vast majority of forex brokers benefit from the spreads between forex currencies. There is no need to include separate brokerage fees, avoiding additional expenses. Compare this to trading in equities or other assets, where the brokerage structure varies greatly and such expenses must be considered.
Diverse Trading Strategies
The forex markets are open 24 hours a day, allowing traders to trade whenever they choose, which is highly convenient for short-term traders who take positions for short periods of time (say a few minutes to a few hours). Few dealers trade over the whole off-hours period.
For example, during the day in Australia, it is a night on the East Coast of the United States. A trader in the U.S. can trade AUD during U.S. business hours because it isn't likely to much change and prices are stable during these times for AUD.
The notional value of daily trading on the forex market is higher than on any other financial market. This gives the highest level of liquidity, so even big orders for currency trades can be filled quickly and without big price changes. This eliminates the chance of price manipulation and price discrepancies, making it possible to have tighter spreads, which leads to better pricing.
Traders don't have to worry about the high volatility of equity markets during opening and closing hours or the fact that prices don't move much in the afternoon. Unless big events are expected, the same price patterns (with high, medium, or low volatility) can be seen during nonstop trading.
No Central Exchange
As a global over-the-counter market, there is neither a central exchange nor a regulator for the forex market. The central banks of many nations sometimes interfere when necessary, however, this is a rare occurrence that only occurs under severe situations. The market has already recognised and priced the majority of these events. Such a decentralised and (mostly) unregulated market aids in preventing unexpected events. Compare this to the equities markets, where a business might unexpectedly announce a dividend or post enormous losses, resulting in significant price fluctuations.
This low level of regulation also contributes to low costs. Orders are placed directly with the broker, who independently executes them. A further benefit of deregulated markets is the ability to take short positions, which is prohibited for certain security classes on other markets.
Multiple Pairs to Trade
There are 28 major currency pairs that consist of eight major currencies. Timing, volatility patterns, and economic developments can be used as selection criteria for currency pairs. A forex trader who enjoys volatility can switch between currency pairs with relative ease.
Low Capital Needs
Due to the narrow spreads in terms of pips, it is simple to begin forex trading with a little quantity of cash. Without more funds, it might be impossible to trade on other marketplaces (like equity, futures, or options). For forex transactions, the availability of margin trading with a large leverage factor (up to 50-to-1) is the frosting on the cake. While trading with such large margins has its own inherent risks, it also makes it simpler to achieve more profit potential with minimal cash.
Suggested read: Common forex trading mistakes to avoid
Trading stocks entails purchasing and selling individual shares of stock in publicly traded companies. If you have a particular amount of a company's stocks and shares, then you can essentially say that you own a portion of that business. A stock trader may be either a trained professional or someone who engages in trading on their own on behalf of a financial institution. There are three main types of traders that participate in the stock market: knowledgeable traders, uneducated traders, and intuitive traders.
Swing traders, day traders, traders that follow momentum, and traders who purchase and hold positions are some of the most frequent types of traders.
Time tested gains
The most fundamental aspect of investing directly in markets is the market's capacity to deliver the kind of profits it does. According to historical statistics, stock markets have always withstood the test of time, gaining value over time despite daily fluctuations in individual stock prices.
Investing in firms with a regular growth pattern and higher quarterly profits, or in sectors that contribute to the nation's economic development, will result in your wealth and the value of your investment expanding consistently over time.
As this value increases, there is a monetary gain, and the investors reap all the advantages of their initial investment. On the stock market, it is stated that a long-term investment in particular equities guarantees a profit.
Safety against Inflation
The main purpose of investing is to secure our future, but we must continually monitor inflation. If inflation and the rate of return on investments are the same, there will be no profits. In a perfect world, the rate of investment return would exceed inflation. The performance of stock markets and benchmark indices has regularly exceeded inflation. For instance, if inflation is between 3% and 4%, market returns have been around 10% every year. In addition, the rise and fall of benchmarks have been the primary predictor of inflation. For instance, if the market is consistently collapsing, the news may indicate that inflation is imminent.
Liquidity or Conversion Ease
Stocks are regarded as liquid assets since they are readily convertible into cash and have a high number of buyers at any one moment. The same cannot be true for other assets; real estate, for example, is notoriously difficult to sell. It may take months before you see a return on your real estate investment. However, it is considerably easier in the case of stocks. If the average volume of transactions is large, then several buyers and sellers exist for that particular stock. As the process never ceases, the liquidity of a stock market is one of the most important advantages for investors.
Investors profit from the economy
The stock market is always a factor in a growing economy, and it reacts to all economic growth indexes, such as gross domestic product (GDP), inflation, and corporate profit, among others. The value of an investor's stock market holdings grows in tandem with economic growth. When an economy is expanding, corporate profits rise, and as a consequence, so does the income of the average person. Consequently, client demand grows, leading to increased sales. Consequently, the value of your investment in a certain firm increases, or the share price increases.
Stake in the brand ownership
By investing in the company's stock, the investor acquires a stake in the company. It gives them a sense of belonging to the business you appreciate. As a shareholder, they have a say in how a company makes decisions and can vote on those decisions. Shareholders have intervened multiple times to prevent management from taking irrational actions that are detrimental to their interests. A company's annual report is sent to its stockholders to inform them of its operations.
Suggested read: Stock market basics for beginners
The primary distinction between forex and the stock market is, of course, the asset traded. Forex, or foreign exchange, is a market for the buying and selling of currencies, whereas the stock market trades in shares – the ownership units of a company. Your decision regarding whether to trade currencies or stocks should primarily be based on which asset you are interested in trading; however, there are additional factors to consider.
The opening hours of a market may have a substantial effect on your trading, influencing the amount of time you must spend watching the markets.
Due to the forex market's worldwide nature, you may trade 24 hours per day, five days per week. This presents many opportunities for trading but also increases the possibility that the market may move while you're away. Developing a risk management plan with adequate stops and limits to safeguard your trades from needless losses is essential if you want to trade forex.
The greatest time of day to trade forex is when the market is the most active, which often occurs when two trading sessions overlap since there are more buyers and sellers. For example, if you are interested in GBP/USD, London and New York share the same trading hours from 12 to 4 p.m. (London time). The additional liquidity will accelerate trades and potentially reduce spread costs.
The trading of shares differs in that it is often restricted to the opening hours of the exchange where the shares are listed. Increasingly longer trading hours are being made available to traders, allowing you to respond swiftly to breaking news even when the market is closed.
Before trading forex or stocks, a further consideration is what influences market pricing. Both markets are primarily driven by supply and demand, but a variety of other variables may also affect pricing.
When trading stocks, you must consider a number of factors that directly impact your chosen company, such as its debt levels, cash flows, and earnings, in addition to economic data, news reports, and sector health.
In forex, however, the emphasis is often much broader, since a more complicated array of variables may influence the market price. In general, you must evaluate the country's macroeconomics, such as unemployment, inflation, and gross domestic product (GDP), as well as news and political events. Due to the fact that you are purchasing one currency while selling another, you must be mindful of the performance of not one, but two economies.
The ease with which an asset may be purchased or sold in a market is its liquidity. The greater the number of traders, the greater the amount of money moving through the market at any one moment, making it simpler to find someone to take the opposite side of your position.
Forex is the biggest and most popular financial market in the world, which makes it incredibly liquid and prone to daily turnovers in billions of dollars.
The liquidity of the market may change throughout the day as various trading sessions start and shut around the globe, and it also fluctuates substantially based on the FX pair you select to trade. According to the Bank for International Settlements, just eight currency pairings account for the bulk of trading activity; for instance, the dollar is engaged in about 75% of all forex exchanges (2016).
The number of daily deals on the stock market is very low, yet shares are nevertheless simple to access and trade. Large, well-known companies, such as Apple, Microsoft, and Facebook, are often the most liquid since there are many interested buyers and sellers. However, as you move away from blue chips, liquidity typically decreases considerably.
Volatility is a measure of the likelihood that a market's price may undergo significant, unexpected movements. A market with high volatility will see rapid price fluctuations, while markets with low volatility will experience more gradual price fluctuations.
Due to the simplicity with which forex may be exchanged, it is very volatile. Despite the fact that the market typically trades within a narrow range, the volume of transactions on the forex market may cause prices to fluctuate rapidly. When trading foreign exchange, it is essential to be abreast of political, economic, and social developments, since the market is prone to erratic and abrupt fluctuations in reaction to these announcements.
The stock market tends to have more steady, observable price patterns over time. However, similar to the foreign exchange forex, it may experience periods of instability and is particularly vulnerable to domestic politics. As a result of US President Donald Trump's trade disputes with China, for instance, the Dow Jones plummeted significantly in March of 2018.
Volatility in trading may give traders many possible profit possibilities, but it also increases the chance of loss, thus it is essential to take precautions to avoid needless loss.
When picking between forex and the stock market, it is essential to discover all available options, including the ability to short-sell. The ability to short a market enables you to bet on both rising and falling markets, adding a new dimension to market movements.
Given that forex trading entails purchasing one currency and selling another, traders have always had access to collapsing markets. Traditionally, while investing in stocks, one could only take a long position, seeking to benefit from any future growth in a company's stock price. But owing to derivative products like CFDs, you may go long and short on firm shares, providing you access to trading possibilities regardless of the market's future direction.
Conclusion: Forex or stocks?
If you are still wondering whether to trade forex or stocks, you should focus on what works best for you personally as opposed to what is objectively more profitable. Forex trading, while yielding bigger short-term earnings. Additionally, you will need to commit more time to forex trading, since it often takes daily attention and the study of currency pairings.
If you are seeking a location to park your funds and receive passive income, the stock market may be your best choice.