Difference Between Forex And Stock Trading

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forex vs stock trading

Whether you trade stocks or currencies, achieving success depends to a great extent on the effort you take to learn the factors that cause these markets to move and implement and perfect certain trading strategies. There are pluses and minuses as far as stock and currency trading are concerned. It is definitely not possible to generalize as to whether stock or currency trading is better. It is for you, as a trader, to decide whether you should trade stocks or currencies based on your trading style, risk appetite, financial goals and several other factors. However, it pays to have a clear understanding of the differences between stocks as forex trading so that you can take an informed decision as to whether involving in forex trading or currency trading suits your needs the best.

Forex Versus Stock Trading: The Differences

#1: Market Accessibility

As far as market accessibility is concerned, the forex market is open for trading for 24 hours in a day and six days in a week. This is because there are a number of currency exchanges around the world and trading keeps happening in some time zone.

On the other hand, stock markets remain open typically for about 7 to 8 hours in a day for 5 days a week. Strictly speaking, it is possible to trade stocks for 24 hours in a day and five days in a week in the 21st century. However, it is easier said than done.

#2: Leverage

In stock trading, the leverage available to you will be a maximum of 2:1 and you will have to satisfy certain qualification criteria prior to availing it. All investors do not qualify for a margin account.

In the case of the currency market, all you need to do to qualify and obtain leverage is to open a trading account. In the US, you can get only a maximum of 50:1 leverage. However, brokers from other countries offer leverage up to 200:1, or even more.

#3: Liquidity

When trading stocks, you will be buying shares of companies costing anywhere from a few dollars to several hundreds of dollars. Price of stocks varies based on supply and demand.

Forex trading is different in the sense that currency supply in a country may fluctuate, but the liquidity will always be very high. The forex market is the most liquid of all the financial markets. All major currencies around the world are highly liquid.

#4: Paired Trades

Currencies are always traded in pairs. Therefore, you need to keep track of the economic health of the country whose currency you are interested in trading. However, you have to keep an eye on the economic health of the other country as well. A host of other factors like job growth, political situation, etc., are also to be considered. This is to say that a single trade on the currency market calls for an analysis of two financial entities. Further, forex markets exhibit greater sensitivity to political as well as economic situation of other countries.

In the case of stock markets, the fundamental concerns when it comes to buying and selling are different. For example, if you are buying shares of Intel, the primary aspect you will be concerned about is whether the value of the stock will increase or not. You will be less worried about the prices of the shares of other companies. Of course, the stock market in a country is not immune to social, economic and political situations, but, in general, is less sensitive to situations in other countries.

#5: Price Sensitivity to Trade Activity

The price sensitivity to trading activity is different for the stock and currency markets. A purchase of 10,000 shares can impact the company’s stock price, especially in the case of smaller corporations that have only fewer shares outstanding, when compared with that of larger corporations having a large number of shares available in the market.

In sharp contrast, currency trades of even multiple hundred million dollars in one of the major currency will most likely have little or no effect on the market price of the currency.

#6: Forex Market Never Experiences Bearish Trend

In the case of stocks, you can generate profits by shorting when the market declines. Theoretically, the risk involved is extremely high and you can incur unlimited losses. However, it does not often happen in real life. This is because the broker will end the short position at some point. Most financial advisors warn against shorting. They are of the opinion that it is to be done only by experienced traders. This is because they know how to limit orders and execute parallel stop loss in order to exercise more control over the risk involved.

In forex trading, it is easy to go long or short on a currency pair. The risks involved in either case are the same. Further, you are not required to take additional precautions to limit your losses.

#7: Regulation

Major exchanges operate under the purview of the regulatory authority of a country and they place a number of restrictions to trading stocks. You may not very much like the restrictions and limits imposed on stock trading by exchanges and regulatory authorities, but they serve to protect you and other traders.

The forex market, on the other hand, is largely unregulated and operates without a central exchange. As a result, the extent of protection available to traders is comparatively less.

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Ultimately It Is Your Choice

Most traders are more familiar with the stock market than the forex market. The familiarity provides a feeling of comfort to them. The biggest advantages offered by the forex market are relatively lesser degree of regulatory control and higher levels of leverage. These factors make it easy for traders to control large trades, even in the absence of specialized training, with limited amounts of funds. However, this is also the drawback of the forex market. Forex trading offers great investment opportunities, but also raises the risk involved.

Ultimately, the dynamics of trading stocks and currencies are different and you need to decide as to which one best suits your style and risk appetite.

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