Despite the great popularity of cryptocurrency trading in recent times, the foreign exchange (forex) and stock markets are still the most popular. While trading in these markets looks somewhat similar, there are several important differences between currencies and stocks.
An overview of the basics of the forex and stock markets
The forex market involves the trading of currencies or currency pairs.
The stock market involves the trading of shares in the ownership of companies listed on the stock exchange.
Market trading hours
Currency trading takes place 24 hours a day, five days a week. The day is divided into three sessions — Asian, European and American. The market reaches peak trading activity during the hours where two sessions intersect.
In contrast, shares trading takes place during certain hours.
Impact of news and economic data
The forex market is usually affected by macroeconomic indicators: employment, inflation, GDP growth, etc. It also tends to react to news and political events.
On the contrary, most of the time a stock trader has to deal with a large number of factors that are directly related to the stocks of the company they are trading: company’s cash flow, profits, and debt, etc.
The number of options available in the market
The forex market involves huge trading volumes. However, the number of financial instruments available for trading in this market is relatively limited.
On the other hand, trading volumes in the stock market are lower than in forex, but they are also huge. The large number of trading options available gives the trader the opportunity to search for some stocks that are trading below their fair value, which creates opportunities for huge profits when the market realizes the current pricing error. However, this large number of options can overwhelm a trader. One solution to overcome this dilemma is for the trader to focus on the blue-chip stocks, such as Amazon, Apple, Facebook, and Microsoft.
Liquidity
The forex market is the most liquid financial market in the entire world. This means that the trader will probably have no problem buying and selling the currency they are trading.
The stock market is less liquid compared to forex, but it remains deep and highly liquid, especially if we are talking about stocks of blue-chip companies.
Leverage
Forex traders often benefit from the opportunity to access high leverage ratios. This helps to increase the chances of potential profits, but it also carries the risk of multiplying losses in the market, which may witness sharp fluctuations at times.
On the contrary, you will notice limited leverage when trading stocks. This situation makes the stock market somewhat safer for inexperienced traders.
Conclusion
Traders who like to make quick, short-term trades (including day trades) and are willing to take a high degree of risk will be more interested in the forex market. On the other hand, the stock market is more suitable for traders who prefer stability and focus on long-term investments.
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