NO04 - Why Trade Forex: Forex vs. Stocks

"When someone talks about the markets in general, the first thing that comes to mind is of course the stock markets. This is because stocks are so widely covered in the mass media. Whether it is on the internet or in your local newspaper. But the forex markets also are equally massive. They are just as important for the financial markets as a stock market is. In this article, we compare the differences between the forex and stock markets. You will get a better understand of how different these two markets are. In fact, the approach taken to trade these markets are quite different as well. Get well informed with this article which will walk you through the differences between these markets and how you can make money trading the currency markets as well. You will be able to understand by the end of this article about how forex markets operate in a slightly different way compared to stocks or equity markets."

If you thought that forex trading and stock trading is one and the same, then you are mistaken. Trading stocks is totally different to how you would trade forex. In this article, we outline what stock trading is all about and then explain the difference between forex vs. stocks.

The stock markets certainly make a lot of noise. Switch to any financial TV channel and you will have people discussing and talking stocks more than currencies. By now you should start to drop the notion that stocks trading and forex is the same.

They are, on certain ways, but two very different markets on the whole. Learn about the differences between forex vs. stocks in this article.

What are stocks?

Stocks or stocks trading is to do with buying and selling shares in a company that is publicly listed. When you buy stocks or shares, you are basically buying ownership of the company. This entitles you to profits such as dividends which a company can distribute from time to time.

Stocks are traded at a stock exchange such as the New York Stock Exchange or the NASDAQ to name a few. Every stock is traded at its own domestic exchange and operates during the regular business hours.

The stocks are priced in the local currency. Therefore, a stock that you purchase in the U.S. is valued in USD, whereas a stock that you buy in Frankfurt is priced in euros. The stock market comprises of different market participants such as hedge funds, investment firms, pension funds, investment banks and many more.

Trading stocks can be risky because they are closely related to the overall performance of the industry or the sector they operate in or the global economy on the whole.

How do stocks work?

To be able to transact the stock markets, you will first need to open an account with a stock broker. The stock broker acts as the intermediary between you and the exchange where they pass the orders on to.

Because stocks are traded during local business hours, they are not open 24 hours a day. Trading in foreign stocks on in other exchanges are also limited due to regulations. The stock markets are regulated by the central authority.

In the U.S. it is the job of the Securities Exchange Commission which oversees and regulates the stock market. While it is possible to speculate on stocks, such as day trading stocks, they are highly restricted.
Furthermore, it is not that easy to go short on stocks, especially for those that you don’t own the shares. With stocks, traders or investors need to focus on the performance of the company.

Every company that is publicly listed must release its quarterly earnings report and must file these reports on a regular basis. Not every company can be listed on the stock exchange. There are minimum turnover and revenue requirements for the stocks to be listed.

Difference between forex vs. stocks

Now that we have an understanding of stocks, let’s see how they are different to forex.


Forex Stocks
Forex trading is basically trading or speculating on currency movements Stocks trading is basically investing or speculating in the movements of a stock price
The forex markets operate 24 hours a day, 5 days a week, globally Stock markets are opened for only eight hours a day and during the local business hours
Forex can be traded on margin and leverage Stocks can also be traded on margin and leverage, but this is limited to 1:20. There are also rules that you should adhere to avoid penalties.
You can go long or short in the forex markets with ease (buy and sell) With stocks, you can primarily buy and sell the stocks that you own. You can also sell short stocks that you do not own but this requires additional regulations
With forex you are basically betting the performance of one currency with another In Stocks, you are betting whether the price of a stock will go up or down
Forex trading is done over the counter and thus poses a counterparty default risk Stocks are traded at an exchange and therefore eliminates the need of a counterparty default as you are required to post collateral
With forex, there is no exchange of the physical securities In stocks, you actually get ownership of the company via shares assigned to you

To conclude stock trading is all about speculating on the performance of a company in the economy. Forex trading on the other hand is speculating on the performance of one currency to another.

Therefore, in forex you can see one currency valued in another foreign currency and vice-versa. This is not the case with stocks. Stocks trading is mostly made up of long term investors. Speculators or day traders only make a small portion of the market participants.

With forex, the majority are speculators, especially in the retail forex markets.

Read 968 times Last modified on Friday, 03 May 2019 17:55