Most online traders have certain preferences when it comes to the financial markets they invest in. Some may choose to trade the stock market, while others may prefer to trade in the forex market. In order to trade profitably, online traders first need to understand the differences between these financial markets. This will help them understand which market is likely to suit their trading preferences and risk tolerance. It will also help them make better decisions when it comes to implementing their trades.
In this article, we’re going to highlight some of the key differences between these two popular financial markets and the benefits of investing in each.
What is the forex market?
The forex market is where people buy and sell currency pairs. It is the largest and most liquid financial market in the world, with a seemingly endless amount of major, minor and exotic currency pairs to choose from. The most popular major currency pairs for forex trading include EUR/USD, GBP/USD and USD/JPY, among many others. The goal with forex trading is usually to make a profit from short-term price movements.
What is the stock market?
The stock market is where people buy and sell company stocks. A stock is a representation of ownership of a portion of a company depending on shares held. For example, you own 200,000 shares of a company whose total number of shares is 4,000,000. Then it means you have a 5% ownership stake in the company. Some of the most popular stocks for stock trading include Amazon, Apple, Facebook, and Tesla. The goal with stock trading is usually to make a profit from long-term price movements.
Differences Between the Forex and Stock Market
Liquidity
The forex market is more liquid than the stock market. This is because of the high volume of daily transactions and the millions of forex traders who trade daily. Traders in the forex market can enter and exit their trading positions, set up stop losses and take profit levels with ease. The stock market works slightly differently. There is a lower volume of daily transactions, but stocks are still easy to access and trade. Traders in the stock market can still enter and exit their trading positions with ease, but depending on what stocks they trade, they might notice less liquidity.
Market Control
The forex market is decentralised with many participants. This ensures that no individual or organization has control of the market price. In the stock market, share prices can potentially be manipulated to suit company objectives.
Market Access
The forex market is a 24 hour market open from Sunday to Friday. Forex traders can choose any trading session they want, whether that’s Sydney, Tokyo, London, and New York. The stock market, on the other hand, is a bit more limited. For example, many stock traders focus on the US market with one major trading period from 9:30 a.m. to 4:00 p.m. EST. There is a much smaller “after-hours” trading market, but those hours typically have less liquidity and are less popular than regular trading hours. In this sense, the forex market can be more convenient than the stock market.
Volume
One great thing about the forex market is the large volume of assets available to trade. There are hundreds of currency pairs to choose from, including major, minor and exotic forex pairs. Many forex traders tend to lean toward major currencies such as EURUSD and GBPUSD, as these are considered to be fairly stable within the forex market. When it comes to choice though, there’s no beating the stock market. You can trade on thousands of global shares including both blue-chip stocks. Many stock traders lean towards the most well-known and widely available stocks such as Twitter, McDonalds, Microsoft, and eBay, as these are considered to have fairly stable long-term outlooks.
Since the stock market is centralized, with third parties coming between the buyers and sellers. This leads to the traders incurring extra costs. The forex market, on the other hand, has different currency dealers who offer competitive quotes. This results in the traders getting better and cheaper deals.
Volatility
When it comes to forex trading, currencies are always quoted in pairs. This means that you need to keep an eye on two things – the economic health of the country whose currency you are trading, as well as the economic health of the country against which you are trading. For example, is one country showing more signs of job growth than other, and does it have a better GDP? This means that there are two sets of economic data to consider, and twice as many news items that can affect market volatility.
When it comes to stock trading, you only have to focus on one company at a time. This means that you only need to focus on one thing – the financial health and long-term prospects of the company you are investing in. While the economic health of the company’s primary market can affect a company’s long-term outlook, on the whole, individual stocks are less sensitive to economic and political news. And that an individual stock price is less likely to be affected by broader economic trends.
Which market is right for you?
Why trade the forex market?
The forex market offers traders more flexibility. It also has low entry requirements and favourable trading conditions. This is because many forex brokers have low deposit accounts and leverage. As such, the forex market could be a good choice for new traders with less starting capital and less time for trading. The forex market offers traders more simplicity. It also has easy market access and good trading support. This is because many forex brokers have a good range of trading instruments, free educational resources, and free trading tools. As such, the forex market could be a good choice for new traders with less trading experience and less knowledge of the financial markets.
Why trade the stock market?
The stock market offers traders more variety. This is because there are so many companies to choose from. That, along with the excitement of investing in popular brands, often make it an appealing choice for online traders. The stock market also offers traders more simplicity. It can be easier to wrap your head around than the forex market. This is because buying a stock is still a relatively simple concept – you’re just buying a share of ownership in a company. That, along with the highly regulated environment, often make it an attractive choice for new traders as well.
Final Thoughts
As you can see, the forex market and the stock market both come with their own benefits. The forex market offers flexibility and easy market access, while the stock market offers more simplicity and greater variety in terms of investments. It is possible for online traders to make money on both the forex market and the stock market. And so it really comes down to your trading strategy and personal risk tolerance. To learn more about investing, check out our educational section.
Ready to learn more about trading? Check out our education section for more articles about how to trade forex and how to trade stocks.
