Stocks or shares?
Technically speaking, there are differences between stocks and shares. However, the way the terms are used interchangeably in the financial world, it is quite clear that the distinction between them is pretty blurred.
For all intents and purposes of this article, it is assumed that stocks and shares refer to the same thing, namely, an indication of ownership in a company. To simplify things, the term “stocks” will be used in this article when the focus is on the difference between forex and stock trading.
Trading forex or stocks?
There is no ultimate answer, or even an easy one, to the question which of stocks or forex is the best for trading in investments.
Both forex markets and stock markets have their benefits and disadvantages.
A choice between the two will eventually depend on personal preferences, trading style, and risk tolerance.
However, knowledge about the differences and correlations between the forex and stock market, enables traders to make informed trading decisions, based on aspects such as liquidity, market conditions, and market hours.
As already mentioned, the term “stocks” refers to a share in the ownership of a company. In other words, investing in a company. Forex means to trade in foreign currencies.
Differences between forex and stocks
General difference
The forex market, also called the currency market, is a decentralized market. It comprises a trading network of participants, trading electronically worldwide. Large players in the market are, inter alia, commercial banks, central banks, investment banks, and other financial institutions.
Stock markets are regulated and transparent marketplaces where stocks (shares) of public companies are traded between buyers and sellers. These days, almost all trades are executed electronically.
Volume
The forex market is the largest financial market in the world, trading around 6,5 trillion US dollars daily. Contrariwise, all the world’s stock markets combined, approximately trade an average of 200 US billion dollars a day – only a fraction of the forex market’s volume.
Most of the trading in the forex market is focused on the seven major currency pairs: The Euro/US Dollar (EUR/USD), the British Pound/US Dollar (GBP/USD), the US Dollar/Japanese Yen (USD/JPY), the US Dollar/Canadian Dollar (USD/CAD), the Australian Dollar/US Dollar (AUD/USD), the US Dollar/Swiss Franc (USD/CHF), the New Zealand Dollar/US Dollar (NZD/USD).
A large trading volume means many advantages for traders. Trading orders are typically filled more easily and closer to preferred prices.
Liquidity
The higher the volume of the forex market, the greater its liquidity. The forex market is exceptionally liquid, due to the large number of trading participants at any given time. Hence, there is always a large amount of currency available.
Liquidity facilitates trading of currencies. It leads to tighter spreads, and lower transaction costs compared to stocks, which is one of the major benefits of trading forex instead of stocks. More liquidity at each pricing point better equips forex traders to open and close their positions.
Concerning stock markets, popular stocks can also be very liquid. For instance, blue chip stocks like Apple, Microsoft, and Naspers. However, moving away from blue chips, stocks can become remarkably less liquid.
Accessibility of markets
The forex market is more accessible than stock markets. It is an over the counter (OTC) market where trading is facilitated through the global network, called the interbank market.
This means that forex trading can be executed worldwide during different trading sessions of countries with different time zones. Consequently, forex traders have access to trading effectively 24 hours a day, 5 days a week. Hence, forex traders can customize their own trading schedules.
On the contrary, stock market trading is limited to the trading hours of stock markets. Trading hours can vary from 09:00 to 17:00 for a specific stock exchange. For instance, the Johannesburg Stock Exchange (JSE) is open from 09:00 to 17:00 (CAT).
Leverage
In stock trading, a trader is normally allowed to trade with a maximum leverage from 2:1 to 10:1. You also have to meet some qualifying requirements to trade with leverage. Not every investor is approved to have a margin account. Thus, you will likely be trading without the benefit of leverage.
Trading with forex is quite different. To be able to trade with leverage, you only have to open a forex trading account. There are no qualifying requirements to be met. Depending in which country you trade, you can possibly have leverage as much as 200:1.
However, although the higher leverage in forex trading enhances investment opportunities, it can also pose the danger of considerable risk.
Regulations
Major stock exchanges have numerous limits, rules, and regulations, while forex trading is less regulated.
Scope of focus
There is a difference in scope of focus between a forex trader and an investor trading in stock. With forex trading, the focus is wider. Analysing fundamentals, forex traders are more interested in macroeconomics, such as inflation, gross domestic product (GDP) and growth rate, in order to determine the performance of a country’s economy, hence, the country’s currency. Because a currency pair comprises two currencies, the focus will not on just one economy, but two.
The focus of an investor in stocks is narrower. When analysing a company to determine the intrinsic value of its stock, relatively narrow financial indicators, such as cash flows, financial ratios, debt level, and so on, will be the main focus. Put differently, factors directly influencing the company will be of more importance than wider trends in the economy. Although, the wider scenario in which a company operates, will also be focused on, but not in depth.
Forex or stocks?
In conclusion, a few suggestions to help you if you have to choose between forex trading or investing in stocks.
In trading, the golden rule is always to stick with what works best for you. If you have more knowledge about the one market than the other, you might be more successful in staying in your area of expertise.
Your choice will also, to a great extent, depend on your goals and the trading style you prefer.
Frequently Asked Questions
Is Forex easier than stocks?
Forex is easier to trade but that doesn’t mean stock trading is bad.
Is it good to invest in Forex?
Forex investment is a good choice for beginner traders who first wants to check out trading on the markets before investing more money
Why is Forex considered a bad idea?
For mainly two reasons: Greed & Taking on too high risks.
Is Forex profitable?
With the right strategy it can be profitable, but the key here is having a profitable trading strategy in place
Can I trade Forex with $10?
Yes, and even less because there are brokers where only $5 is needed to start trading.
Top 4 Brokers
