1 place in the rating! Free trading training!
Social distance and remote working become a social benchmark due to the outbreak of the Covid-19 epidemic in early 2021. As a result, many individuals have sought ways to make money online, and brokerages have accordingly seen a big boost in new trading accounts to varied financial products. In comparison, forex pairs and stocks receive the most attention from traders and investors. Looking thoroughly at the main differences between the two instrument classes, you would find out which one best suits your risk tolerance and trading style.
Stock Trading or Forex Trading – How They Compare
Forex is by definition a marketplace where all dealing-in activities of foreign currencies are conducted. Such instruments are always traded in pairs which are categorized into three batches: majors, crosses and exotics in descending order of risk levels.
Meanwhile, stocks represent your partial ownership of a certain company. However, not all individuals have enough capital to directly buy and hold the equities of companies, not to mention that many corporations refuse to engage in direct purchase activities and authorize these tasks to third parties, typically online brokerages. Accordingly, individuals can open a margin account that allows them to use borrowed amounts to accelerate their buying power. Also, those who want to bet on price movements rather than benefiting from the underlying values of stocks over the longer haul prefer trading plans to invest.
Both forex and stock traders may participate in Contracts for Difference (CFDs) that enables traders to enter both financial markets without their physical holding of respective assets. This plan reduces their approach to a wider range of instruments though. Despite some similarities between forex trading and stock trading, you should ponder some considerations as follows before deciding to invest in either.
Liquidity refers to how financial assets are easily bought and sold without significant changes in prices. Currencies are definitely the most liquid instrument with a global daily turnover of US$6.6 trillion as of 2019, whereas the global stock market recorded the whole-year value of US$70.75 trillion at the same time. This proves that as the world’s biggest money market, forex permits traders to easily find the counterparty to their positions. Moving forward, they simply enter and exit transactions at desired prices.
Inevitably, not all forex pairs are equally liquid and the same applies to shares as well. Traders often choose major pairs that are formed by the eight most powerful currencies as they make up the vast majority of trading volume, typically the US dollar (USD) accounting for more than 87% on the other side of currency trades. Similarly, in the equity market, beginners are highly recommended to pick up blue chips that come from financially sustainable companies (e.g. Apple or Facebook) as they are more liquid than other fellows.
1 place in the rating! Free trading training!
Volatility is another consideration used to distinguish the two mentioned markets. This factor measures how the instrument’s price changes. A highly volatile market often witnesses the rapid fluctuations of the instrument’s price, whilst the market with lower volatility moves at a steadier rate.
The forex market is believed to be more volatile on the ground of its ease of access. Indeed, the deregulated nature of forex, which derives from its operations under the supervision of no formal exchanges or clearinghouses, allows traders to magnify their deposits up to hundreds, or even thousands, of times and therefore it tempts many more traders every year. As a reaction to important news announcements, traders – whether professional or inexperienced – may promptly get in or out of the market to either lock in profits or avoid further losses. Little wonder that this drives the market to change so rapidly and unpredictably.
By comparison, blue chips are considered a safer financial instrument because their higher stability is backed up by the strong financial conditions of issuing companies. However, staying away from those stocks means you have to be confronted with higher stakes and greater volatility.
Rookie traders should not select highly volatile products because they lack a deep understanding of the two given markets and have poor analytical skills of price actions to deal with their accompanying risks. But, is volatility always bad? Various professional and veteran traders said no as they can capitalize on this feature to make huge incomes.
Regardless of investment products, traders can open a leveraged (so-called “margin”) trading account. Stock traders are normally provided with the maximum leverage of 1:20 at FinmaxFX, whilst that of the forex market is much greater, up to 1:200. Although leverage ratios vary as per brokerage companies and instruments, there is no denying that forex trading offers you more powerful purchases than stock trading.
However, those getting exposed to bigger risks may be more prone to failure as no one, even professional traders, can always make a precise forecast about market movements. Therefore, how much is reasonable to augment capital should be included in your risk management plans.
Drivers Moving Instrument Prices
There is a myth that traders merely base the price analysis on technical indicators and tools. In reality, the observation of factors that influence the instrument’s value is not less critical. Generally, supply and demand are the culprits behind the movement of both financial markets, yet they are driven by a wealth of other elements.
Currencies, regardless of their kinds, are issued and regulated by government bodies. Thus the forex pricing is impacted by more complicated factors in macroeconomic terms such as gross domestic product (GDP), unemployment rate or consumer price index (CPI). In addition, it is essential to concentrate on political events and other crucial reports. Some recent breaking news including the post-Brexit trade deals, successful vaccine rollover or new Covid variants also become a signal for the subsequent market fluctuations.
When trading in the stock market, the focus is narrowed down to the financial performance of your selected company. Particularly, you have to spend hours thoroughly reading its financial statements to learn about its current debts and cash flows. Nevertheless, the company’s operation is hardly separated from its sector and the whole economy or political situations of jurisdictions where it is working. Hence, it is improbable to neglect the industry health, economic data and other political news when fundamentally analyzing the market.
One competitive edge of forex is its 24/5 access that means you can partake in the market 24 hours a day and five days a week thanks to the opening hours of different financial centers. The unlimited accessibility, coupled with advanced trading platforms compatible with all types of devices, enables you to open any position whenever you can and wherever you are.
Having said that, this can be a nuisance because not all the time is appropriate to enter the competition. Practically, you should commence with a trade in the most active time of your selected currency pairs. It is when two trading sessions cross.
Assuming you open some mini lots of the EUR/USD, the best time to jump into the market is when the overlap of London and New York sessions which respectively represent the two traded currencies occurs. An increasing number of traders are reported to flock to the forex market over that time, which leads to higher liquidity and consequently lower spreads paid to brokers as their mainstream of income. Meanwhile, trading in heavily volatile hours may augment the possibility of losing money due to the shortage of purchasers and vendors at your required prices.
The forex market is closed at weekends or at least, dealing desks stop working these days. Nevertheless, fewer cash flows continue circulating bureaux de change which open in several venues such as airport terminals to serve those exchanging foreign currencies for commerce or travel. Additionally, banks and other financial companies may authorize professional traders to enter some trades as a response to upcoming major news over weekend breaks.
On the other hand, the stock market is confined to particular operation time frames of exchanges. For example, the opening hours to trade these instruments at FinmaxFX range from 1.31 p.m to 8 p.m GMT+0 and from 7.05 a.m till 3.30 p.m GMT+0 except for weekends and holidays. Those getting occupied over this limited span hardly perform stock trading and may miss ample opportunities to get in or out of the market.
Dealing in forex out of normal trading schedules is not advisable. Because the market is mainly dominated by banks, the shortage of most trading volumes in weekend breaks will pose you to acute dangers. Meanwhile, some brokers still empower clients to open stock trades out of normal hours though there are admittedly more risks such as lower liquidity and bigger volatility.
Is Forex Trading Better Than Stock Trading?
Frankly, no financial product is more important than the other because the selection depends much on your attitudes toward risks, experience and trading style. Normally, newcomers should speculate on highly liquid products such as major currency pairs or blue chips, whilst volatile products are preferred by professional or veteran traders who are capable of accurately forecasting the markets to make huge incomes. Besides, despite your choice, you should include risk management strategies in trading plans to control potential risks and optimize profits. Generally, having a diversified portfolio with different asset classes is a wise choice to have consistent profits and keep risk in check at the same time.
1 place in the rating! Free trading training!