Forex trading vs Stock trading – the most notable differences
Traders have a large number of financial markets to choose from. Despite the huge popularity of cryptocurrency trading recently, the foreign exchange (forex) and stock markets are still the most popular. While trading these markets looks pretty similar, there are some key differences between currencies and stocks. This guide explains these key differences, familiarity with which will help you decide which of these two markets is better for you.
This guide can help the beginner to better understand which market suits their needs. But it will also come in handy for experienced traders who might want to try their hand at trading in a new market, be it a forex trader considering stock trading or a stock trader looking to get into the exciting world of currencies.
Should I trade forex or stocks
An overview of the fundamentals of the forex and stock markets
The Forex market involves trading currencies, or if we want to be more specific, currency pairs. This means that when a buyer buys one currency pair, he is simultaneously selling another currency.
The stock exchange involves trading in shares owned by listed companies.
There are also derivatives markets for both stocks and currencies, which in turn can have different rules for trading. However, in this guide we will mainly focus on stock trading in its most basic and simple form.
market trading hours
Forex trading takes place 24 hours a day, five days a week. The day is divided into three sessions – Asian, European and American. The market reaches its peak trading activity during the hours when two sessions overlap. The main advantage here is that the trader has the freedom to participate in the forex market at any time throughout the day. However, this has a downside, which is that the market can experience strong moves while the trader is sleeping. This fact makes the use of safety precautions such as stop-loss orders even more important for forex traders.
In contrast, stocks trade at specific times when the stock exchange on which the stocks are listed is open for trading.
Influence of news and economic data
The forex market is usually influenced by macroeconomic indicators. This includes important data such as employment, inflation, GDP growth, etc. The forex market also tends to react to news and political events. Since forex trading is essentially about two currencies, the trader should be aware of what is going on in both economies associated with these two currencies. Additionally, news from a country unrelated to the pair’s currencies can also affect the currency pair. This is the case when that country has strong economic ties to one or both of the countries involved, or when that country has a significant impact on the overall global economy (e.g. the United States and China). In short, a forex trader has to consider many different fundamental factors.
On the contrary, most of the time a stock trader has to grapple with a variety of factors directly related to the stocks of the company they are trading. Examples of these factors are the company’s cash flow, earnings and debt. However, some general factors such as the development of the sector in which the company operates, macroeconomic data and geopolitical news may also affect the share price.
Learn about the options available in the forex market
The Forex market is the largest financial market in the world and involves huge trading volumes. However, the number of financial instruments available for trading in this market is relatively limited. In fact, there are some currency pairs that are freely traded and not subject to exchange rate management guidelines.
On the other hand, the trading volumes on the exchange are less than forex, but they are also huge. The stock market offers traders a large number of investment options. On the plus side, the large number of trading options available gives the trader the ability to look for some stocks that are trading below their fair value, creating opportunities for huge profits if the market sees the current price error. On the other hand, however, this large number of options can overwhelm a trader. One solution to overcome this dilemma is for the trader to focus on the blue chip stocks like Amazon, Apple, Facebookand Microsoft focused. Another option is to use Exchange Traded Funds (ETFs), which contain an integrated set of assets related to a specific sector or economy, eliminating the need for the trader to select each stock separately. Global indices like the S&P 500 and Dow Jones are also another option for stock traders who may not have the time or expertise to conduct detailed research on each company separately. A trader can also take the risk of looking for cheap stocks or less popular penny stocks in hopes of finding a startup with promising opportunities for growth and success.
The foreign exchange market is the most liquid financial market in the entire world. This means that the trader will likely have no problem buying and selling the currency they are trading, especially when trading major currency pairs. Even with exotic currencies, a trader is unlikely to encounter a situation where they cannot find anyone willing to buy or sell this type of less liquid currency, as the forex market is active 24/7 around the world is.