Both the forex market and stock market are components of the financial market. Yet, both the markets differ a heap sight. Based on your experience, knowledge, and risk appetite, you can pick one or more markets and create either a forex merchant account or a trading account to grow your money. This article will provide you with insight into the differences between both markets. These points will help to make your trading decisions wisely.
What is Forex?
Forex or foreign exchange is a market where all global currencies are being purchased, sold, and speculated on. Bankers, individual traders, and travellers in need of local currency are the players in this market. The exchange rate decides the price at which market players buy or sell currencies. The exchange rate is defined as the value of one currency in terms of another currency. It indicates that to buy one unit of a currency, how many units of other currency do you require.
For example, at the time of writing this article, USD/GBP was 0.7625. This means that if you give 1 USD, you will receive 0.7625 GBP, or you will need to pay 1.3115 USD to get 1 GBP. Exchange rates fluctuate depending on the demand and supply of one currency. The higher the demand, the greater is the price and vice versa.
To trade in forex, you will be requiring a forex merchant account and these days, there are several forex merchant account providers like PayPound, IG, FOREX.COM, etc. You can create your account with any one of them and start your forex trading.
What is Stock?
Stock means equities. It means that when you buy a stock of a particular company, you are buying a fraction of ownership in that company. For example, buy a share of Tesla, and you own a part of the company. Large companies issue millions of shares in the open market. When you own a share out of one million total shares, you have one one-millionth ownership of that company. It depends on the number of shares issued and total equity.
The decision on how much to offer equity in the form of stock and how many shares to issue lies with the company. For example, a company decides to issue 5 lakh shares of stock worth 40% of the equity. Here, each share indicates ownership worth 0.008 % of the entire company.
With trading account providers like Merrill Edge, Fidelity, etc, you can make your trading account and start your trading journey with proper research and knowledge.
Forex vs Stock Market: Key Differences
Both forex and the stock market have overlapping similarities. Yet, both are different in many ways. Here, we have mentioned some key differences below.
- Factors Determining the Trading Price
In the forex market, currency prices are determined based on demand and supply. Currency price and demand have a positive correlation. It means, increasing demands increase the prices and vice versa. Economic factors such as inflation, interest rates, employment levels, gross domestic product (GDP), sales and manufacturing index and current account deficit also play a major role in price determination. So, an investor has to research the macroeconomic conditions of the country.
The stock price fluctuates depending on the financial health of the company, gross revenue, profitability, growth plans, industry growth rates, etc. Although the industry to which the company belongs is important, individual performance and plans are huge determining factors. So, investors need to indulge in more company-specific research before buying any stock.
- Trading hours
Trading hours between forex and the stock market are different. Due to overlapping time zones, the forex market is active 24 hours a day and 5 days a week. This is one of the biggest advantages of trading in forex, that you get more time to trade.
But, the stock market is open at particular hours of the day. Working Hours depend on the specific exchange and region. For example, the London Stock Exchange (LSE) remains open between 08:00 to 16:30. While the New York Stock Exchange (NYSE) operates between 9:30 to 16:00. Certain exchanges also remain closed during a lunch break. You will find this, especially in the Asia-Pacific region. Yet, both of these financial markets are closed over the weekend.
Volatility is a measure that indicates how rapidly stock or currency prices fluctuate. As Forex is traded worldwide, it is a volatile market. Even though price movements are usually not wide, they can make a big difference in the profit or loss you make. Unlike the forex market, the stock market is stable. An investor or trader can study price patterns. This strategy is ineffective in certain extraordinary political or economic conditions. It is a better option for an investor with a low-risk appetite.
Liquidity is a sign of how easily and quickly you can find buyers or sellers for an asset in the market. High liquidity indicates higher trading volume. And also higher chances of successful completion of the trade.
Both the forex and stock markets are highly liquid markets. The forex market enjoys the status of the largest and most liquid financial market in the world. This indicates that a large volume of currency can be bought and sold without fluctuating prices.
On the other hand, the stock market experiences less trade per day. Though it is still liquid, sometimes investors face issues while transacting with penny stocks that are not actively traded as popular blue-chip stocks.
Leverage in trading is a major factor to consider while selecting between forex and the stock market. It is also known as margin trading. It enables traders to enter positions of more value than available funds. Traders highly use this function to magnify their profit with less capital.
Generally, the forex market offers leverage as high as 20:1. That means traders can multiply their trade size by 20 times. The stock market, however, offers a low leverage ratio of 5:1. Indeed, leverage helps to amplify profits, it also magnifies possible losses. Leverage is the most beneficial to traders who have more experience in a volatile market.
Which is More Profitable?
There is no clear winner between forex and the stock market in the matter of profitability. The choice depends on financial goals, risk appetite, and the individual’s experience.
If you are willing to make small and recurrent profits, forex is the best suitable market for you. Profits emerge due to frequent price fluctuation. In the forex market, it is easy to make money for experienced and focused traders. However, the forex market also increases the risk of losses with the leverage. It is a risky option when appropriate risk management actions are not taken.
If you thrive to follow the buy-and-hold approach, the stock market is a safer and regulated option. You have to pick the right stock based on your technical and fundamental analysis. Afterwards, you can make even larger profits in the long run. The stock market requires relatively more time to show a visible profit.
You can make good money in both forex and the stock market with the right strategies. If you are a complete beginner with small capital, the forex market might prove to be a better option for you.
Which is Easier to Trade?
Thanks to extensive education platforms, accessing various trading educational tools is much easier. Studying blue-chip stocks or forex currencies with large trading volumes is easy. There are many analysis software available for this purpose. Even a novice trader can enter a buying or selling position. One has to make a few clicks using online trading platforms. Complex Analysis tools are simplified to help even a beginner grow rapidly.
However, it is quite debatable which is easier between forex and the stock market. Both need a different kind of fundamental and technical analysis. One needs to perform deep market research. A few traders find it easier to trade in one market than in the other. The choice always lies with the individual depending on personal experience and goals.
Forex vs stock is a never-ending debate that is continuing for a long time. Both have their own advantages and disadvantages. An individual should choose wisely among the two. Whether you choose a forex merchant account provider for forex trading or trading account provider, select the platform that suits the best with your needs. With experience, anyone can earn revenue from both the market.