Differences Between Forex and Stocks

Forex and stocks are two interlinked in several ways and the most popular global markets. With the increased popularity of the financial markets, there are a lot of investment opportunities in the range of different categories of assets. When it comes to such assets as currencies and stocks, we should understand that they are considered as the moving force in the development of major economies.

Having the role of determining the value of different currencies, forex is more popular among traders as they mostly concentrate just on several currency pairs for conducting trading operations, while the stock marketplace is all about attracting investments for a wide range of listed companies offering partial ownership.

So, forex or stocks? Before making the decision concerning the market you want to trade in, it’s vital to understand your personal preferences, risk tolerance and assess your time management skills.

What is Day Trading

Forex stands for trading on the foreign exchange marketplace where the currency pair is understood as the asset for proceeding with trading operations. It’s considered to be the largest segment of the global financial system since it’s tied to the world’s broad-spectrum events.

When it comes to forex, we should understand that it is decentralized, so we talk about the global virtual space where different national and commercial banks, foreign exchange brokers, insurance companies, MNCs, small businesses, and millions of traders conduct transactions. These market participants are both sellers and buyers of certain currencies at current or determined prices, thus the value of one or another currency changes every second according to the levels of its supply and demand in the market. Everything is interconnected here. The trader makes a profit as a result of increasing or decreasing the value of a particular currency compared to another.

Let's say you buy British pounds and sell US Dollars (choosing the GBP/USD currency pair). To make a profit, you need to sell US dollars as soon as the pound sterling is appreciated against the dollar.

The US dollar, Japanese yen, euro, pound sterling, and Swiss franc are considered to be the most popular currencies in the financial market. They’re included in the group of major currency pairs: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. Being the most traded currency in the marketplace, the US dollar is used as a measurement instrument for the evaluation of other currencies.

When it comes to forex, we should understand that it is decentralized, so we talk about the global virtual space where different national and commercial banks, foreign exchange brokers, insurance companies, MNCs, small businesses, and millions of traders conduct transactions.

The stock market refers to the global economic and financial instrument with the function of regulating the turnover of securities by selling, buying, pledging, or exchanging. When we talk about the stock market, we mean the securities market with its stocks, bonds, and futures.

With the stock market, companies can attract investments by issuing securities, while investors can draw income from owning shares. To understand the mechanism of its work better, here are the stock market participants: issuers, financial intermediaries, investors, and market makers.

It has an important impact on the economy of any country, making it possible to develop its infrastructure and improve the well-being of citizens. Trading on the stock market requires having an open account with a reliable and licensed broker, as well as a deposit for the purchase of securities.

Interesting fact: At the time of marketplace instability, there can be a sharp increase or decrease in the shares prices because of the massive purchases or sales. Such cases are considered as the green light for using such a mechanism as a temporary halt in trading (trading halt). This gives investors time to make balanced decisions and maintains stability in the market.

Top differences between forex and stocks

Stocks vs forex: what hidden pitfalls are there while you’re about to make a move? First and foremost, it all comes down to your decision on whether you want to trade stocks or currencies, which are the assets of these two different global markets. There can’t be any answer to what market is better for executing operations since it depends on your personal preferences and trading experience. The trading experience is helpful here since you have a deeper understanding of how this mechanism (even if we talk about different markets) works and make a more considered decision. There won’t be an answer to the question like "why should you trade forex instead of stocks?" or vice versa. It’s about your personal preferences.

Assets

Here comes a pretty interesting thing when we talk about assets. Talking about forex, we do understand that there are different kinds of official currencies in the world, but the traders mostly concentrate on just a few currency pairs, which are most likely to be among the above-mentioned majors.

The reality of the stock market is different - investors are faced with thousands of different securities issued by different companies: yes, these can be market giants, but unknown companies are also actively looking for a place in the sun. If the investor can’t afford the securities of a big company, he might consider buying the one that is offered by a new or small company which brings more risk.

Hours of work

Forex is open 24/5 in different countries from 5:00 p.m. EST on Sunday until 4:00 p.m. EST on Friday with the customer service that is usually available 24/7.

The thing every trader should consider while dealing with forex is a trading schedule that strongly depends on any of the four trading sessions: Pacific, Asian, American, European.

Well, it’s all different with stocks. For example, the US stock exchanges open at 9:30 a.m. EST and close at 4:00 p.m. EST. So, it’s not a good option for active traders who can’t contribute their time to executing operations during working hours.

Liquidity

High trading volume equals high liquidity. Liquidity refers to the ease at which you can buy or sell an asset, thus high liquidity results in lower transaction costs and lower spreads. Major currency pairs in forex are known for their particularly tight spreads and costs for transactions in comparison to stocks. The thing about them is that they’re very popular among all marketplace participants.

The volume of trades in the stock market is much lower per day, which results in lower liquidity. Of course, if we talk about the shares of the blue-chip stocks, we will see high liquidity as there are always a lot of buyers and sellers interested in them. The thing is that not everyone can afford such shares, so moving away from popular stocks means facing a less profitable reality.

Price sensitivity

Buying 20 000 shares in the stock market may have an impact on the stock price if we talk about smaller corporations with fewer shares issued. When it comes to buying or selling several hundred thousand dollars, the chances of creating an impact on its market price are much lower.

Market regulations

Major exchanges of stock trading are more restrictive than forex trading that is less regulated. It’s about being provided with more information while buying shares of some companies, but in forex, your moves strongly depend on your expertise and trading strategy.

Market influence

There is another factor you should consider before making the decision. Yes, both markets are influenced by supply and demand, but, in its turn, the supply and demand strongly depend on various factors. So, how many of those factors are there in the forex market? Actually, there are a lot of those that can impact marketplace pricing: political events, economic news, inflation, unemployment rate, extreme climate events, and many others.

The stock market requires you to focus on just a few impactful factors: the company’s earnings, debt levels, some economic data, and reports.

Economic downturn

When we talk about stocks, the economic downturn of a country negatively affects the dynamics of companies’ shares. It becomes unprofitable to trade them. It’s easier with forex since a trader buys rising currencies and sells falling currencies.

Conclusion

If a fast-paced and flexible environment is something you’re looking for, then consider trying forex. Those who choose stocks value their low volatility and predictability. Of course, every marketplace has its own benefits and drawbacks, but it’s you who make the decision whether the general benefit is beneficial personally to you or not. You know, it depends. It always does. Assess your trading experience, think of your time management, decide what assets are more interesting for you to trade, and just try.

by JustMarkets, 2021.03.17

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