Stocks Vs Forex Trading comparisons have been a long-time debate. Stocks and forex trading are two of the most popular financial markets worldwide, constituting the largest educational resources, historical volume, and market volatility.
Deciding which is better is difficult because both have advantages, disadvantages, similarities, and differences. Thus, the decision lies with the trader. Generally, forex is riskier but has a high probability for short-term wins, while stocks are slower and have long-term growth. However, it also depends on the specific investments on either side.
According to Babypips, there are approximately 2,800 listed stocks on the New York Stock exchange, while the forex market has over 6.6 trillion dollars of daily trades.
Before you decide on either, knowing which is best for your risk appetite and trading strategy is crucial. In addition, setting realistic expectations will help you avoid unnecessary pressure in trading.
Continue reading this article to know the similarities and differences between stock and forex trading.
First, What is Forex Trading?
Forex is a network of buyers and sellers who exchange currency with one another at an agreed price. It is how central banks, companies, and individuals convert one currency to another. For instance, if you have ever traveled outside your country, you will most likely have made a forex transaction.
Although most foreign exchanges are for practical reasons, many currency conversions are to earn profit. The amount of currency converted daily, making them highly volatile, determines the price movement. The forex market volatility level makes it attractive to traders because it increases the chance of high profits.
There are over 180 types of official currencies in the world. However, most international forex trades use the US dollar, Japanese yen, British pound, and euro. Other common currency trading mediums include the Swiss franc, Australian, and New Zealand dollar, etc.
Notably, the primary reason forex traders lose money is due to a lack of proper risk management.
Now, What Is Stock Trading?
Stock trading involves buying and selling shares in a company to make money on price changes. Stock traders watch the short-term price change closely to buy low and sell high. This short-term approach makes stock traders different from traditional stock market investors, who trade for long-term.
For those who term the market correctly, trading stocks can bring quick gains but also implies significant losses. A company’s fortune can rise and fall more quickly, depending on the market’s dictates.
Stocks Vs Forex Trading: What Are the Differences?
The most significant difference between stock trading and Forex trading is the market. While the stock market deals in shares (the unit of ownership in a company), forex is a marketplace for buying and selling currencies. Your asset influences your decision on trading stock or currencies
Here are other factors you should consider:
1. Market Trading Hours
The opening hours of a market can significantly influence your trading, impacting the time you will need to monitor the markets. Since forex is a global market, you can trade every hour of the day, five days a week. This gives you enough opportunities to trade, though it creates the risk of the market moving while you aren’t available to monitor it.
You must create a risk management strategy with appropriate stops and limits if you have decided to trade forex. Risk management protects your trades from unnecessary losses. It is best to trade forex when the market is most active, usually when two sessions imbricate, because there will be more buyers and sellers.
2. Market Influences
You should also identify what moves the market prices before you trade shares or forex. Demand and supply are the main determinants of stock and forex markets, but several other factors can move prices, including economic data, news reports, etc.
However, the focus tends to be wider with forex because a more complex range of factors can impact market pricing. You need to consider the country’s macroeconomics, for instance, inflation and gross domestic product (GDP), unemployment, and news and political events.
Also, you must know the performance of not just one economy but two because you buy one currency while selling another.
3. Liquidity
Liquidity is how an asset can quickly be sold or bought in a market. You must consider liquidity because the higher the volume, the more money flows through the market at any given time. It makes finding someone to take the other side of your position easier.
As mentioned earlier, forex is the world’s biggest and most popular financial market, meaning it is highly liquid and frequently sees a daily turnover of trillions of dollars. Market liquidity can change daily, with different sessions opening and closing worldwide, but it varies depending on the FX pair you choose to trade.
Conversely, the stock market sees comparatively fewer trades daily, but shares are still easy to trade and access. Popular stocks such as Microsoft, Apple, or Facebook are the most liquid because there are always more buyers and sellers. Still, there is often significantly less liquidity once you move away from blue chips.
4. Volatility
Volatility is a measure that determines if the market price will make significant, unforeseen price fluctuations. A market with high volatility will experience quick price changes, whereas markets with low volatility tend to have moderate price changes.
Though the market trades within a small range, the broad number of trades on the forex market can result in quick price changes. Keeping current with economic, political, and social events is essential because the market is prone to drastic and sudden movements in response to these announcements.
Although the stock market can also see periods of volatility and be sensitive to domestic politics, it tends to have more stable price patterns that you can track over time. Trading volatility can undoubtedly provide more opportunities for traders to profit, but it also increases risk, making it vital to prevent unnecessary loss.
5. Going Short or Long
You must identify all the available opportunities when deciding between stock and forex trading. Shorting a market gives you a new dimension of market movements, enabling you to speculate on rising and falling markets. Traders can access falling markets since forex trading entails buying one currency and selling to another.
However, you would traditionally take a long position when investing in shares because you had been looking to profit from the future increase in the value of the company’s stock. Fortunately, you can go long and short on company shares because of derivative products such as CFDs. This gives you equal access to trading opportunities, no matter the market’s future direction.
Stocks Vs Forex Trading: The Final Thoughts
There is no definitive answer when deciding on stocks and forex trading. That is because they both have their benefits and drawbacks. Your attitude towards risk and personal preferences influence your decision.
If you want a fast-paced movement, you should invest in forex because it provides ample opportunities for short-term traders such as swing traders, day traders, or scalp traders. On the other hand, you can opt for the stock market to take advantage of short to mid-term trends or less volatility.
I hope this article has been a safe place for you in the heat of the argument, stock trading Vs. forex trading.