Forex Vs. Stock Trading: Why and How To Trade Them
Wednesday 4 November, 2020
Understanding the forex vs stock relationship is vital in determining the best market for trading. Read on to gain more insights into this relationship.
Is Trading Stocks better than Forex?
Traders use information from the forex vs stocks trading relationship to determine the market they wish to trade. Even though they are interconnected, forex & stock-market are very different. The forex market has unique features that make it stand out from the other markets. Take the first step to start trading open your account with EverFX.
For you to choose between forex & stocks, you need to first understand the trading style before settling on any one of the two. You must make informed decisions based on market conditions, volume, and liquidity once you understand the differences and similarities between the stock and forex market.
1. Differences between Forex & stocks
- Volume: One of the major differences between forex & stocks is the forex market size. Forex trades an estimated $5 trillion in a day. This comes with a lot of foreign exchange but primarily focused on a few major currency pairs like GBP/USD, AUD/USD, and EUR/USD. When you combine the dollar volume of all the world's stock-markets, the stock-market dwarfs it. Furthermore, the world's stock-markets average roughly $200 billion per day. This kind of enormous trading volume will put many traders at an advantage. These high volumes mean that traders can get their orders executed easily and to their desired prices.
- Liquidity: A market with high volume traders will generally have high liquidity. Liquidity results in tighter spreads and spending less money on transactions. Forex has very low spreads and transaction costs in comparison to stocks. This is one advantage that traders will have when dealing with the forex market versus the stock market.
- 24 hours a day: Forex is not always transacted over a traditional stock exchange. The transactions happen through the interbank market. This means that trading occurs in different parts of the world during different trading hours and sessions. Traders are entirely able to trade virtually for 24 hours, 5 days a week. On the other hand, major stocks trade at varying times, suiting day traders, and are affected by some factors.
- Minimal to no commission: Most of the Forex brokers do not charge any commission but instead, they will make their margin on the spread. Spread is the difference between the buying and selling price. When trading stocks, you must pay the spread along with a commission to a broker. Hence, you can consider using forex spreads since they are more transparent than the costs used for dealing with other contracts.
- Narrow vs wide focus: You can focus on eight major currencies. The stock world offers thousands of currencies. Furthermore, there are only eight economies to focus on and because forex is traded in pairs, you may want to diverge and converge the trends between the currencies to match up a forex pair that you can trade. It's easier to monitor eight currencies compared to thousands.
Is Forex more Difficult than Stocks?
These days, traders are more informed; thus, find it easy to trade forex & stock. You need to find online brokers, set up an account, deposit any amount of money, and start. You can have your account set up within minutes but this will depend on the broker that you get.
Deciding which one is better between stock and forex trading will depend on the amount of money you want to spend. Also, it will depend on whether you wish to make a long-term investment or if you wish to make short-term investments. Stocks are preferable if you wish to invest for months or years.
If you wish to become a forex trader, it means your investment will be more profitable if you do it in the short term. You have to understand certain aspects of forex and stock trading to decide which one works for you.
- Available instruments: Stocks are not making it easy for traders and investors to come to available instruments. There are thousands that you can choose from. Most traders resolve this issue by going through as many of them as they can. Once they choose the ones they feel comfortable with, they stick to them. Traders can trade with the instruments that they have chosen and ignore the rest of the market. Traders don't have a hard situation. They just need to be good at understanding the movements of a few currencies, this will work well for those who wish to specialize. Currencies are always subject to change, buying, and trading against another, then doing the reverse when the situation is favorable is easier.
- Market hours: Stock-trading does not occur 24/7. It can only be done during business hours on workdays. On weekends it gets closed completely. This means traders have less opportunity to trade. On the other hand, forex trading is available 24/7. Even though it closes during the weekends, it is much more available compared to stocks.
- Leverage: After a certain period, you get the experience and are attracted to the concept of leverage often. Therefore, you tend to get confident enough and feel like you can handle more risk. Stock traders might get disappointed since the best leverage they can get is 1:2. These individuals can get minimum leverage of 1:33 and a maximum of 1:100. This leverage is riskier but comes with a bigger reward.
Is Trading better than Investing?
Investing and trading are two genres of wealth creation in an equity market. The two are different approaches when it comes to wealth creation in the financial market. There are several differences between investing and trading.
- Period: This is a method of holding stocks just for a short period. Traders hold stocks until the short term high performance, on the other hand, investing works on the buy and hold a principle. Investors will invest over a long period.
- Capital growth: You can often monitor the movement of prices in the market. If the prices are high, you can sell your stocks. Trading involves timing the market while investing involves wealth creation by compound interest over several years through holding quality stocks in the market.
- Risk: Both trading and investing involve risk on your capital. Trading involves a much bigger risk with high potential returns since the price might fluctuate from high to low within a short period. Investing takes a while to develop since it involves a lower risk but potentially higher returns after a long period.
- Art vs skill: It is a skill since it involves timing the market and learning the market trends to accumulate profits in a short time. Investors analyze the stocks they are interested in. It includes learning and understanding the business and commitment to invest over a long time.
Is Forex Trading Good Investment
The forex market has high-profit rewards. It has the potential to multiply your investment just overnight. On the other hand, the stock-market only earns you profit when the market stocks are up. Investing in forex is advantageous since you are certain to make a lot of money even if your foreign currency is going down.
Experts who have acquired more experience can engage in short selling. This is an investment strategy that speculates the decline of some security prices. This strategy is to be used by traders who have experience.
Conclusion
Both forex & stock global markets have their advantages and disadvantages. Therefore, you have to choose which financial market you are comfortable with. You will be better off staying in your area of experience once you understand one market from the other. If you found this information insightful, feel free to share it with friends and colleagues.
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