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Forex Vs. Stocks: Top Differences And How To Trade Them

7 Min Read
Last Updated April 30th 2021

Anyone considering a career in financial markets and in trading, in particular, has multiple types to choose from. There are bonds, derivatives, options, commodities, among others, but it is the stock and forex markets that are most prominent and popular of all. However, the two can be quite different in their functioning and how to approach trading in them. 

A stock market is driven largely by the performances of the companies with the technicals and news influencing individual stock prices. While macro level economic conditions and political developments do play a part, it is the company level indicators like corporate earnings, company level news like mergers and acquisition, among others, that have an impact. 

The forex market, which is a virtual global marketplace where currencies are traded from across the world, has a more universal significance. The driving factors are mostly economic and political and can be influenced by both national and international developments. 

The Top Differences - Forex Market Vs. Stock Market

These two types of markets cater to two different niches and the differences between them begins right there. While one deals with the forex market and has its own set of processes and factors that influence it, the other focuses on company stocks and has its own ecosystem and dependencies. 

But the differences only just begin there. We round up the major points on which the forex and stock markets stand apart from each other on multiple counts.

Market volumes

At nearly $7 trillion worth of trades happening daily, the forex market is huge and way bigger than the stock market that does a relatively modest $200 billion in a day. 

That said, the counters where trading happens tells a different story. There are stock markets all over the world with the major ones like NYSE, NASDAQ and those in the bigger cities like London, Tokyo, Shanghai, Hong Kong and so on. Each trades in hundreds of stocks that are listed on each of the stock exchanges. 

The forex market, on the other hand, is an OTC (Over the Counter) and does not have a central location. There are segments, however, that comprise of currencies that have peak trading based on the time zones of operation.

Read Also: The Best Forex Trading Hours

Liquidity

Stock market sees large volumes being traded across the gamut ranging from blue chips to penny stocks. However, stocks issued by a company are limited and the trading is confined to what is available in the market. Depending on the size of the company, the liquidity also can vary but is still not infinite.

But the significantly larger size of the forex market over the stock market means the liquidity is also much higher. There may be only 18 pairs of currencies that are most often traded but these comprise the bulk of the forex market deals. The market size itself is a good indicator of the supply available which is reassuring for anyone seeking liquidity.

Volatility

The stock market has, historically, been susceptible to market manipulation. There have been numerous instances when funds, broker cartels and even companies have been guilty of both bull and bear charges on specific stocks to exploit prices for their narrow interests. Insider trading has been an area of concern in most stock exchanges.

The forex market is much too large for any entity to control it. The size gives it the liquidity to ensure that not one currency can be held to ransom by rogue traders. That is not to say that there have not been instances in the past but they are quite rare. In a market that accommodates a wide range of players from governments to banks, hedge funds to individual traders, the liquidity available makes it much less volatile.

Check Out: What Are The Most Volatile Currency Pairs?

Margins and leverage available

This one difference itself is significant for any trader. Stock markets, typically, offer anything from 2:1 leverage to 4:1 for day traders who enjoy a higher line and settle their positions daily. Getting a higher margin is also not easy for new and small traders.

This is in contrast to the high leverages in the forex markets. In US there is a 50:1 leverage, while in other countries there is a 400:1 leverage in the forex market. The high leverage allowed can be quite risky, however, but it allows traders to attain profits and losses with far less capital than is required for stock markets.

Market timings

Unlike the stock market that has specific operating hours different for each stock exchange, the forex market works 24 hours a day. In the U.S., the stock exchange working hours are usually between 9.30 AM EST and 4.00 PM EST. The forex market has to work round the clock given the various time zones.

Commissions

Conventional stock brokers charge for each trade that happens in the stock market. This can reduce the overall returns that you can make in your dealings in stocks. But when you trade in the forex market, there is zero commission or transaction charges levied. As most forex traders operate online, commission free trades can be a huge advantage.

Read More: Forex vs Stock Trading: Which one is better?

How to Trade the Forex and Stock Markets

So, trading in the two markets – forex and stock – is quite different. The approach and the strategy needed too will be diverse. 

Trading in the Forex Market

Anyone planning to start trading in the forex market has to remember to enter it with complete understanding of the basics of forex and currency pairs and follow the international economic and political scene. Identify enough good resources to follow news, views and updates that affect the foreign exchange situation. 

For the actual trading itself, find a reputed and dependable service provider to open a trading account with. Get familiar with the software used and start off with demo accounts first. Make use of forex signals and guidance from expert traders and established analysts if you can even as you start making your first trades.

Be prepared to spend odd hours as forex trading is a 24-hour process and, depending on the currency pairs you decide to trade in, you might have to stay up late or wake up early.

Trading in the Stock Market

The aspiring stock market trader can start off by opening a brokerage account online. Follow this up with setting a budget and identify individual stocks into which you allot your funds. Ideally, size up your risk appetite, trading style and the capital you can allocate for stock trading in respect to your overall investments. 

Do some solid research into the various sectors and the stocks within them to identify the ones that suit your trading strategies. The common trading types include Market order where you buy/sell at the best price available or Limit order where you specify the price. 

Subscribe to the best possible content you can find to assess the market conditions and specific stocks. Find a good broker to rely on and practice through a virtual trading account to get comfortable.

Round-up

As someone who is keen on starting financial trading, the decision to choose between forex and stock needs to be an informed one. The above pointers can help you pick what suits you best to get started.

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