Forex vs Stocks
Technology advancements have revolutionized the financial investment scene. The modern investor can now access a wide range of investment opportunities at the click of a button. Forex and stocks represent the two most significant and most popular markets for many investors. Regarding Forex vs stock trading, the two markets have some similarities, yet subtle differences may make investors consider how to include them in their portfolios.
Forex is the largest financial market globally, with daily trading volumes topping $6 trillion. The market is traded over the counter with no centralized exchange. In the forex market, money is the only traded commodity. That is, one currency is simultaneously exchanged for the other.
On the other hand, the stock market is the oldest and most popular financial market globally. It provides a platform for investors to buy and sells shares (units of ownership) of publicly traded companies. Investors can also buy and sell other financial assets such as bonds, ETFs, and indices in the stock market.
Here are some of the factors to consider when you wish to trade Forex or stocks:
Forex is a 24-hour market. The market is conducted and maintained via four financial centres: Sydney, Tokyo, London, and New York. Because of the different time zones in the four hubs, investors can trade currencies round the clock from the Sydney open on Sunday at 2200hrs GMT to the New York close on Friday at 2100hrs GMT.
On the other hand, stocks are only traded during the opening hours of the relevant stock exchange. For instance, if you wish to trade UK stocks, you can only do so during the London open session between 0800hrs GMT and 1600hrs GMT.
Therefore, in terms of forex trading vs stock trading, forex trading hours are more flexible than stock trading hours. Both markets, however, remain closed during the weekends.
Market Volume and Tradeable Assets
As stated above, Forex is by far the largest financial market in the world, averaging over $6 trillion in daily trading volumes. In the forex market, investors can trade hundreds of currency pairs that generally fall into major, minor, and exotic categories. Despite the variety, forex traders tend to stick to just a few currency pairs.
In contrast, the stock market cannot match up to the trading volumes of Forex. For perspective, the NYSE (the largest stock exchange globally) averages daily trading volumes of $200 billion. However, the stock market has more trading instruments (compared to the forex market) that investors actively trade. There is, therefore, a wider variety of stocks to be traded than currency pairs to be traded in the forex market.
For instance, on the NYSE, investors can trade over 2400 stocks categorized in 11 sectors: healthcare, materials, real estate, consumer staples, consumer discretionary, utilities, energy, industrials, financials, technology, and consumer services.
Volatility, Liquidity, and Trading Costs
Volatility is the frequency and severity of price changes in the market. A highly volatile market is one where prices are choppy and unpredictable and make wide ranges in any trading session.
In contrast, a low volatile market has stable and predictable price movements. Forex is considered more volatile than the stock market because currency values are influenced by multiple political, social, and economic factors every other day. Stocks typically follow predictable market cycles and are less volatile than currencies.
Liquidity is how easily assets can be bought and sold in the market. Liquidity is a crucial consideration for investors because it also determines trading costs. Since Forex is the largest financial market globally, the enormous daily trading volumes guarantee massive liquidity practically at all times. This also means that trading costs in the forex market are relatively low.
On the other hand, the stock market is less liquid than Forex, and in some cases, settlement of trades in some exchanges can take a few days. However, stocks of major companies such as Coca-Cola, Apple, and Microsoft tend to be more liquid than shares of other less popular companies.
Leverage is the ability to control big positions in the market by placing just a small margin of capital. Forex is a highly leveraged market, and traders can access levels of up to 1:400 or even more. On the other hand, investors typically only access leverage of 1:2 on most stock exchanges.
Nevertheless, investors can access higher leverage on their favourite stocks when they trade them as derivatives, especially in the CFD market. It is, however, important to note that leverage is a two-way street. It can amplify your profits on successful trades, but it can also magnify your losses on unsuccessful trades.
Trading Styles and Strategies
The dynamic nature of the forex market ensures that there is a wide range of trading styles and strategies that can be implemented. However, most strategies tend to be short-term based, with investors targeting small price changes in the market.
Because of the high leverage, forex traders can still make substantial profits when currencies make marginal price movements. The most popular forex trading strategies are centred around scalping, day trading, and swing trading.
Some examples of forex trading strategies include news trading, breakout trading, trend trading, and range-bound plays. Most forex strategies are heavy on technical analysis to pick out optimal entry and exit price points in the market.
On the other hand, stocks trading strategies tend to be long-term based. Investors aim to pick out stocks of quality companies that will appreciate in the future and provide substantive capital gains.
Because most stocks investors take a long-term view, they favour fundamental trading strategies. They will look into industry trends, company earnings reports, and other relevant news reports. Some stock trading strategies include IPO investing and dividend investing.
Both Forex and stocks are great avenues for generating profits for investors. To determine which market to trade in, investors should assess their personalities, risk tolerance, and investing objective.
Forex is ideal for aggressive traders who have a short-term view and are willing to take in more risk because of the high leverage. On the other hand, stocks are ideal for conservative, patient investors who hold a long-term view and are willing to adopt buy-and-hold strategies.
Correlations and Divergences Between Forex and Stocks
Forex assets have tended to have some relationship with stocks. In general, when equities rise in a country, it reflects the underlying economy and can lead to the demand for the local currency.
For instance, if Japanese stocks rise, it will imply that the economy of Japan is getting stronger, which can lead to demand for the Japanese yen. So, a forex trader trading the USDJPY pair and watching Japanese stocks, in this case, will look for opportunities to sell the currency pair. But this is not a straightforward correlation. In some cases, a more robust local currency may impact the profits of multinational companies that derive the bulk of their earnings from overseas territories.
In this case, a divergent relationship may be observed. Currencies may also diverge from stocks of certain industries. For instance, if the US dollar weakens, US companies engaged in exporting to other markets may see their goods become more competitive, and consequently, their stocks will rise.
In some cases, the forex rate can help influence the stock prices of certain companies. For instance, if the EURUSD pair is falling (implying a weakening euro and strengthening US dollar), a company manufacturing its products in Europe and selling them in the US will become more profitable because they are producing in a cheap region and selling in an expensive market.
Forex-stock correlations can provide vital fundamental information that can help Forex and stocks traders identify great opportunities in both or either market.
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- What is more profitable: Forex or stocks?
In terms of profit in Forex and stock trading, both markets can be very profitable and feature high trading volumes and volatility. Forex is potentially more profitable than stocks because of the high leverage levels offered, but there is no guarantee of profits in trading.
- Is FX trading riskier than stock trading?
FX is riskier than stocks because of the high leverage. High leverage exposes traders to higher rewards but also higher risks.
** Disclaimer –While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.