Discerning traders often get into the habit of comparing forex trading vs stock trading to determine a market in which they should invest. While forex and stocks are both an integral part of the financial markets, they have marked differences. Investors who are in it for the long haul are more at home with stocks while those who prefer investing in the short-term may go for forex.
In this write-up, we discuss “forex trading vs stock trading: things you should know & the key to success!”. Whether you pick one or the other depends on the trading style you prefer. Knowing the comparison and difference s between forex and stock trading can help you make trading decisions on the basis of factors such as volume, liquidity, and market conditions. The following are some of the points that differentiate the forex and stock markets:
By size, the forex market is massive. With a daily worldwide trading volume of over $5 trillion, it surpasses the combined volume of the stock markets across the world which stands at a paltry $200 billion daily trading volume. Due to its massive volume, forex trading brings a lot of benefits to the traders. With the high volumes, it is easier to execute trades from traders at their preferred prices. It also means the market has high liquidity levels, thus making market entry and exit easier for traders.
2. Liquidity Levels
Characteristically, the forex market has high liquidity, thanks to the high trading volumes. High liquidity results in lower transaction costs and tighter spreads. In the forex market, major pairs such as GBP/USD, USD/JPY, EUR/USD, and AUD/USD usually have low transaction costs and spread in comparison with the stock market. That’s a point to consider for individuals hoping to choose between forex trading and stock trading.
3. Commissions or Spreads
In most cases, forex brokers do not charge a commission. They make their money from the spread or the difference between the selling price and the buy price. That’s not so for stock traders. When trading indices, futures contracts or equities, traders will pay the stoker broker a commission together with the requisite spread. Another major difference is the transparency in forex trades. It is, therefore, hard to find the same obscurity as that involved in trading other instruments. Using the displayed spread, it is possible to calculate what the trade will cost you upfront.
4. Markets Working Around The Clock
Traditional exchanges are home to the stock market but not so for forex which is transacted over the counter. Forex trading is majorly done via the worldwide interbank network. Trading, therefore, happens continuously around the clock for as long as there is a country that’s still within the trading hours. Forex traders can make their trades on a 24-hour basis for 5 days a week. By comparison, stock trading happens at different times and are susceptible to different variables. That’s mainly due to the localized nature of the stock exchanges.
The forex market has characteristically high leverages which traders get only after sign up for a forex trading account. On the lower side, you can get leverage of 50:1. This can rise to as much as 400:1 when working with certain forex brokers. Not so for the stock market which has leverages of as low as 2:1. Just because it is low does not mean that this leverage is available for everyone. You have to apply for a margin account and if you qualify, you will get the leverage.
6. Trading Spreads
To reiterate, forex markets have very high liquidity levels. As a result, the trading spreads in forex are tighter than stock trading spreads. When they combine, the high liquidity and tight spreads make entry into and exit out of the forex market quicker. That cannot be said about stock trading which is short on liquidity. As such, stock markets are characterized by wider spreads.
To conclude the forex trading vs stock trading discussion, it is important to note that the former seems starkly better than the latter. If you are a short-term investor, putting your money in the forex market is the right thing to do. You don’t need a forex profit calculator to know that. However, if you are in it for the long-haul, invest in the stock market.