The forex markets and the stock markets are two popular choices for investors and traders seeking to capitalise on market opportunities. While both markets offer potential for returns, forex trading and stock trading are two distinct disciplines with different appeal.
If you’re wondering which of these you should pursue, you’ve come to the right place. This guide will discuss the similarities and differences between forex and stocks, what to expect from each, and how they might suit you.
Forex vs stocks: Which one suits you?
|Trade currency pairs on the foreign exchange markets
|Buy and sell shares of publicly listed companies
|Focused on 8 top currencies, although other currencies may also be traded
|Provides access to a wide range of publicly listed companies from various industries and sectors
|Suited to short-term strategies, with trades lasting from hours to days or weeks.
|Suited to wide range of strategies, from day trading to swing trading
|Generally requires a more active approach to trade
|Both active and passive approaches in trading may work
It is important to note that, when trading stocks using Contracts for Difference (CFDs), traders do not own the actual shares of the company. CFDs are contracts between traders and brokers, based on the price difference of the stock from the contract’s opening to closing without physical transfer of shares. As a result, CFD traders do not have any rights of ownership or voting rights in the company, nor are they entitled to any dividends paid by the company.
Is forex trading right for you?
Forex trading revolves around selling one currency against another. This is performed by the trader taking long or short positions on a currency pair, according to their prediction of price movement.
If the price goes in the trader’s favour, the trade generates a profit; otherwise, it results in a loss. Forex traders engage in a series of trades to capture profits from the market, strategically opening and closing positions as appropriate.
Due to this dynamic, forex trading is more geared towards short-term strategies, demanding a fair amount of effort and activity.
To succeed, a forex trader must possess a profound understanding of the currencies they are trading, particularly the factors that cause one currency to strengthen or weaken relative to another.
As such, it is important for a forex trader to have a good grasp of geopolitical events and news that may impact the currencies they are trading. This includes election news, economic reports, inflation trends, interest rates, etc.
Apart from that, forex traders also need to know how to read and interpret price action on a chart. This means having a working knowledge of technical analysis.
Is stock trading right for you?
Forex trading is a rather narrowly focused and strict discipline, while stock trading offers a lot more leeway and flexibility.
A stock trader has the option pursue short-term strategies, such as day trading where positions are closed out at the end of each day, and the process starts anew the following day. Alternatively, they could also take a longer approach like swing trading where traders seek opportunities based on market movements over a period of days or weeks.
Alternatively, active trading using options and other strategies also work well with stocks. Traders can also take long or short positions on the stock markets at appropriate times.
However, it is essential to note that stock trading is not risk-free, and it certainly requires careful consideration. To be successful, a stock trader needs to have the ability to select the right stocks that align with their trading strategy and objectives.
This means knowing how to evaluate a company’s fundamentals, and how to judge whether its valuation is at an appropriate level. A working knowledge of technical analysis and price charts indicators will also be helpful.
Similarities between forex and stocks
Both require keeping track of the news
Forex traders need to keep an eye out for events and developments that could impact the currency pairs they are trading. These include interest rate changes, elections, wars, and economic reports.
Similarly, stock traders need to keep track of important announcements and happenings that could cause a change in stock prices, such as earnings calls, change in regulations, consumer complaints or product recalls.
All these mean that whether you’re trading forex or stocks, you’ll have to stay up to date on the news.
Proper mindset and discipline
Investing in both forex and stocks requires the proper mindset and a disciplined attitude. In short, you should dedicate the time and effort to learn as much as you can about forex or stocks, and constantly seek to improve your knowledge, understanding and skills.
When making trades, it is crucial to stick with a trading plan, complete with proper position sizing and risk-reward ratio.
Opportunities in both bullish and bearish markets
In forex trading and stock trading, traders have the flexibility to open long and short positions, providing them with trading opportunities regardless of whether the price of the asset goes up or down.
In forex trading, if a trader anticipates that the US Dollar will weaken against the Japanese Yen, they may opt to open a short position on the USD/JPY currency pair. Conversely, if they expect the Dollar to strengthen, they may choose to open a long position instead, counting on its appreciation against the Yen.
Similarly, in stock trading, an investor may decide to open a long position on a particular stock that they believe is poised to reach a record high. However, once the stock price has surged to those levels, it is likely to experience a pullback towards more moderate levels. In such a scenario, the trader may then opt to open a short position on the stock, expecting its price to decrease.
Differences between forex and stocks
The size of the market
The stock market may be the more well known of the two. However, did you know that the forex market is the larger of the two? It’s true, and very much so.
According to the Bank of International Settlements, global trading volume for forex in 2022 reached USD 7.5 trillion per day .
In comparison, global equity trading across stock markets worldwide was estimated to be just USD 41.35 trillion for the last three months of 2021 .
Being significantly larger, the forex markets are considered to be more resilient to manipulation than the stock markets. This is often cited as an advantage of forex as compared to stock.
Strategies and time horizons
Forex trades tend to be shorter in nature, typically lasting from hours to days or weeks. As such, forex traders are mostly focused on shorter time horizons when considering their investments.
On the other hand, stock trades offer a broader range of timeframes, accommodating various investing objectives, styles and preferences. Stock trading strategies can span from short-term strategies such as day trading, or monthly options, to long-term strategies like swing trading. This versatility makes stock trading more suitable for a wide variety of investors with different risk tolerances and investment goals.
Forex trading and stock trading are two completely distinct investing strategies, dealing in different markets and asset types. Forex trading often involves short-term strategies and active trading, while stock trading is more flexible, accommodating a greater variety of timelines, strategies, and approaches. Each market offers unique opportunities and appeals to different types of investors based on their trading preferences, objectives, and risk tolerance.
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- “Triennial Central Bank Survey – Bank of International Settlements” https://www.bis.org/statistics/rpfx22_fx_annex.pdf Accessed 26 July 2023
- “Value of global equity trading worldwide from 1st quarter 2017 to 4th quarter 2021 – Statista” https://www.statista.com/statistics/242745/volume-of-global-equity-trading/ Accessed 26 July 2023