You want to trade, but there are two different mass-consumer trading markets available. Forex and Stock markets.
So, which one do you choose?
In this post, we explore how are they different and see which one you should trade on.
What is the forex market?
The forex or ‘foreign exchange market is a marketplace in which currencies can be bought, sold, and exchanged. The participants in this market range from banks, individual retail traders, and even travelers in need of local currency.
The price at which the market participants buy or sell currencies is determined by their exchange rate, which is the value of one currency in terms of another - how much of one currency you need to buy one unit of another currency.
For example, the Euro is worth 1.21 U.S. Dollars, meaning it takes $1.21 to buy one Euro.
On a daily basis, trades are performed millions of times by many different individuals and corporations - on average, the forex market trades upwards of 5 trillion U.S. Dollars per day!
This ‘price’ however is not fixed and always changes.
This is because exchange rates are driven based on supply and demand - the higher the demand, the higher the price, and vice versa.
Exchange rates can change depending on things such as world events, news as well as other (sometimes even unknown) factors, though changes on a daily basis are generally very small.
Most forex traders hold their positions for a few hours or days.
What is the stock market?
What exactly is a ‘stock?’ If you purchase a stock or ‘share’ of a company, you are essentially buying a piece of it.
The more shares in a company you purchase, the greater your percentage of ownership. Most companies also pay out dividends to stockholders on an annual or quarterly basis.
A dividend is a sum of money - the greater your ownership, the more money you would receive. Stock market traders generally hold their positions for several days - all the way up to months.
The stock market is a collection of exchanges that trade various stocks in different companies. Shares can be bought and sold to others via this network of exchanges (similarly to buying and selling currencies).
Unlike the foreign exchange market, which operates 24 hours a day every weekday, the stock market is open for 8 hours, 9:30 a.m. to 4 p.m. Eastern time (on weekdays).
The volume traded per day is $200 billion, considerably less than the $5 trillion traded in the forex market. If you would like a piece of the billions (and trillions) of Dollars traded per day, you may consider learning to trade stocks or forex.
Forex vs stocks? The Difference
Due to their volatility and historical volume, both forex and the stock market contribute to being two of the most popular financial markets where you can trade.
But what are their differences?
The first would be in terms of the volume of assets. Forex trading offers up to 330 major and minor currency pairs with over $5 trillion in trading volumes per day.
Nonetheless, the stock market is by no means unpopular, and the opportunities are endless.
Stock trading offers global shares like blue-chip stocks and penny stocks and in a myriad of industries from technology to automobile and more.
Another major component in which stocks and forex differ is directly related to 'liquidity and volatility'.
Stock traders love applying the method called "buy-and-hold" which translates to being in an environment that is volatile. This helps to estimate the fluctuations in the volatility, for when it's high and low, to avoid certain risks.
On the other hand, the Forex market focuses on high-volume activities in the span of a short period - which makes liquidity most effective for Forex traders. For this reason, if you're looking to trade in a short-term Forex market might be the choice.
Thus, choosing either the stock or forex market would come down to trading preferences as well as these factors.
Trading forex vs stocks: How does it work?
The main reason why anyone would be interested in the stock or forex market is most likely to make money, or to hedge trade.
But how exactly does one make money trading in one of the mentioned markets?
The answer to this question is very simple for both stock and forex trading: buy low, sell high. However, the difficult and more complex part is actually finding the ‘highs’ and ‘lows.’
There are two main ways to do this: technical and fundamental analysis.
There is no clear-cut answer about which ideology is better, and thus the debate between technical and fundamental analysis is highly dependent on the individual and their personality.
Both technical and fundamental analyses aim to predict future price movements based on the principles of supply and demand.
Technical Analysis
Technical analysis is the use of past data (such as price or volume) with the objective of predicting future price movements.
In short, technical analysts base their trading style on the saying “History tends to repeat itself.”
By examining past data, traders are sometimes able to identify highs and lows, so that they can buy and sell at the best times to make the most amount of profit.
Technical analysis is applicable to both the stock and forex market (as well as other markets), however, it is primarily used by forex traders. Those who are interested in mathematics, data science, and pattern recognition may also find interest in technical analysis.
Fundamental Analysis
On the other hand, you also have fundamental analysis. This is generally performed on businesses and takes a holistic approach to determining the value of security.
For example, an investor (or trader) would examine the financial performance of a company, calculating values such as net profit, equity ratios et cetera.
They would also take into account the company itself and its market - are people interested in this company? How many people will benefit from its actions?
Macro and microeconomic factors are also taken into consideration (as well as many other factors), and used to determine a company’s potential or future value. Those who are interested in business and long-term investors may find that the stock market is more suitable for them.
💹 Read more on the Benefits of Online Forex Trading
FX trade volume
Volume in the case of both markets is the amount traded in a given period of time (usually one day).
You may now be thinking back to the five trillion Dollars traded in the forex market compared to the 200 Billion Dollars traded in stocks mentioned previously.
Essentially what this means is that in the forex market, traders will find it much easier to get their orders filled at their desired price level - based on the volume, there are always buyers and sellers.
In terms of stocks, traders may find it harder to get their orders executed at a specific price.
This factor can therefore make stock market trading more difficult compared to the forex market.
When does the forex market open?
Considering that the forex market is open 24 hours a day, five days a week, traders may find this more flexible than trading the stock market as it is only open for 8 hours a day. The forex market may therefore be much more beneficial to traders around the world in different timezones.
📊 Did you know?: 8 AM to noon (EST) is considered to be the best time to trade in the Forex market as it usually has the heaviest trading volume.
FX variety
In terms of variety, there are thousands of stocks to trade on the stock market, and only 27 major currency pairs in forex (formed from 8 currencies).
Non-major currency pairs can also be traded, though the total number is still less than 100 pairs.
It is arguably much easier to keep track of eight main currencies compared to thousands of different stocks.
Ultimately, this allows forex traders to ‘get to know’ various pairs to better understand what works for them (and their trading style).
FX fees and commission
Forex brokers make money on the ‘spread’ of a currency pair when you execute a trade. Spread is the difference between the bid and the asking price and is specific to a currency pair.
Spreads are generally very small and can be easily calculated - making the fees rather transparent. The stock market on the other hand generally charges spreads and a commission fee.
These fees are generally around $5 to $10 for a given trade.
This may be a minor consideration for stock traders who trade with a large amount of capital, however, for new or beginner traders, the fees can really damage profits, potentially making forex much better for traders with smaller accounts.
Is forex trading worth it?
It is clear that trading in the forex market has many benefits compared to the stock market, which makes it suitable for a larger group of people due to its flexible hours, lower fees, and higher trading volume.
That isn’t to say however that you should completely avoid stock trading. If you are interested in investing or longer-term trades, the stock market may be better suited to your personality.
Trading both markets requires some of the same as well as very different skills - neither is, therefore, suitable for complete beginners - although forex may be better for newer traders with smaller capital.
If you would like to trade in either market, you should consider doing research and learning strategies and decide which market is best for you.
If you're a business looking to use FX in your payments, or to hedge future payments, consider using Statrys as your go-to payment business account.
