Forex and Stocks are two major markets among different financial markets. Usually, traders get confused between the two while deciding which one to choose for trading. For this purpose, they compare both of them and then decide. There is, of course, not one size that fits all. Therefore, everyone must make decisions on the basis of their concerns, suitability of trading style and choice. Although forex and stock markets are interconnected to some extent, they also have some significant differences. It is better to evaluate those differences to make a better decision about trading.
The final decision regarding trading stocks or forex must be made on the basis of the trading style you follow and the trading goals and objectives your pursuit. Before heading towards the differences between them, let’s have a little introduction to both these markets. A forex market or foreign exchange market offers a trading platform for trading different currency pairs. The participants of forex include individual traders, retail traders, banks, etc. The exchange rates of currencies, which determine their trading prices, are also set due to demand and supply in the market. High demands lead to higher exchange rates and vice versa.
On the other hand, a stock market is a trading platform for shares or stocks of different companies that actually provide you with partial ownership in the company whose shares you purchase. It is a secondary market where shares can be purchased, sold, repurchased, and resold multiple times. The market operates eight hours a day.
Below we have discussed some of the major factors that differentiate both the markets and how you can weigh your decision.
The volume and the size of the market is the first factor that put both the market apart. The volume of transactions in the forex market is absolutely massive. It deals with a volume of daily transactions around trillions of dollars. This volume is far bigger than the combined volume of all stock market trading platforms in the world. The combined transaction volume of stock markets lies around billions of dollars. The large volume of trading possessed by forex markets brings benefits for the traders trading in this market. The high volume of trading increases the probability of order execution near the predicted price level due to the abundance of buyers and suppliers in the market. Conversely, in stock markets, traders hardly get order execution at the predicted price. The ease of trading in the forex market as far as this factor is considered is higher than the stock market.
The high volume of trades also leads to a high level of liquidity for the forex market in comparison with the stock market. In fact, the forex market is the most liquid financial market in the world. Liquidity offers advantages such as low cost of transactions and tight spreads. Major currency pairs in the forex market have low transaction costs and spread. This is by far the most significant factor that proves the forex market better than stock markets.
The time of market operations is the next factor on the list. Forex market is an over-the-counter (OTC) market that means its operations are not conducted in the traditional listed exchanges. The trading occurs through digital means and the interbank market. In other words, this means that trading occurs round the clock all over the world in different countries. This great feature at the forex market’s end of being operated virtually twenty-four hours a day and five business days a week provides it with an edge over the stock market. Stock markets, on the other hand, operate in different trading hours. This simply means that forex markets are more flexible than stock markets.
The involvement of a third party in the form of brokers in trading is a common practice. These brokers usually charge a fee for their services in the form of a commission fee. However, in forex markets, most brokers do not charge commission fees directly from the customers. They make their income on the spread. The spread refers to the difference between the ask and bid price of a currency.
On the other hand, while trading in stock markets via a broker, the trader must pay the commission fee along with the spread to the broker for their services. The fee paid to the brokers in stock markets may be less considerable for traders trading in large volumes. However, for beginners or traders with smaller trade volumes, the fee may be questionable as their profits are also small. Forex spreads offer more transparency than other contracts traded. Therefore, traders with smaller budgets prefer forex markets over stock markets.
The major currencies that can be traded in the forex market are eight, resulting in twenty-seven currency pairs. On the other hand, stock markets offer thousands of various options for investment. The focus required in forex markets is narrow as eight pairs are comparatively easy to manage and keep an eye on. Conversely, thousands of stocks represent wide focus, which means that managing them can be challenging.
Forex markets are more volatile than stock markets. Volatility here refers to the price fluctuations in the short run. Short-term traders usually depend on the volatile market for generating their profits resulting from rapid price fluctuations in the market. On the other hand, other traders with a long-term approach usually prefer less volatility in the market. Less volatility indicates less risky investments. This makes forex markets attractive for short-term traders while long-term traders choose the stock market for conducting trading activities.
The leverage offered to traders in the forex market is higher than stock traders. Leverage allows traders to trade with a small amount of capital to earn larger profits. This also increases the risk of potential loss in the same manner. It makes forex markets riskier than stock markets, especially for beginners and inexperienced traders.
Although the benefits offered by forex markets surpass those provided by stock markets, the final decision about the choice of the market involves other important factors. The most important among those factors are your trading plan, style, capital volume, personality, risk tolerance and trading objectives. It is better to do complete research about both the markets to evaluate their characteristics more efficiently and judge which one suits you the most.