Forex vs Stocks Comparisons

December 28, 2020 - Роман Евдокимов

The Forex market and Stock markets are the biggest and most popular investing markets in the world. Consequently, these two also represent two main highways that a beginner trader can take. Certainly, you could also consider the no less known crypto exchanges or maybe even commodity markets (to invest in precious metals, for instance).

However, Forex and Stock have several very tempting features and advantages that other investing options do not, both for an amateur and a professional. So, let’s see what’s so great about these markets and why people decide to trade on them.

The main features

Forex is short for ‘foreign exchange’, a worldwide network of different banks, funds and companies that participate in currency exchanging. They make substantial profits in allowing people like yourself to invest into some currency A by selling your savings of a currency B. That’s generally how it goes.

Stock market is just a general collection of people who buy or sell their shares in some capacity and under different circumstances. This form of investment is usually more centralized, since most exchanges are connected to the biggest stock exchange around, one way or another. On the Eastern Coast, for instance, most exchanges close at the same time as NYSE.

In essence, these two types of markets are the same. The content and the quality make the difference. For example:

  • Forex is way bigger than the stock The size obviously represents the amount of people involved in trading. And this, for its part, reflects how many deals are conducted daily. Forex sees more of these deals, and therefore it’s more liquid.
  • Money is a necessity. American dollar is especially on demand since it’s used the most by the investors, not to mention ordinary people. That’s why even people who focus on stock exchange will have to use Forex exchanges if they don’t have any dollars for it. In short, currencies are more cost-effective than shares.

It all affects how easy it is to buy and sell on a market. Forex can boast faster speed, tighter spreads and lower fees just because there are more people involved and there are more deals conducted each day.

The parameters worth watching

The scale difference isn’t only represented by the amount of investors and value. Each asset you’re investing into (be that a share or a currency or something entirely different) has the price, as you know. This price isn’t monumental, it changes over time. The profits you make from these markets are made entirely due to price changes.

However, price changes are affected differently on different markets. See for yourself:

  • When investing into stock, you invest into individual shares that suffer effects mostly related to the company that issued them. That’s why you’ll only have to watch out for small parameters. The bigger events will of course change the cost, but these will likely change the cost of many other shares, especially in the same sector. So, for starters, you’ll have to concentrate on the issuer’s state of things. Most notably, look out for the company’s debtand profits trend.
  • Forex investors have to focus on the bigger scale of things. Currencies are very similar to shares – but instead of the companies, the governments issue them. Because of it, you’ll have to learn a bit about macroeconomics – general parameters that affect the economy as a whole. Unemployment, inflation, GDP, GDP per capita, poverty ratesare just a tip of an iceberg.

During each trade on Forex, and on Stock to a lesser extent, you’ll have to take into account two economies. See, when you invest into Forex, you trade at least two currencies, both of which correlate with the economy that issues them. The same goes for Stock, where you may monitor both the status of the currency and of the stock you’re buying or selling.

Essentially, both markets react similarly and to similar metrics. The scale of these parameters is the only substantial distinction. So, the decision of choosing one market or the other should also be affected by how well you understand the metrics of the market. If you grasp macroeconomics better, the choice is obvious.

Types of trading

To reinforce the point that Stock market and Forex are in many things the same, look at the selection of trading tactics and strategies available for these two markets:

  • Long positions

It’s the most basic type of investing on the market, in which the investment is made with the anticipation that the price of the bought asset will rise. It’s a standard tactic for both Forex and Stock.

  • Short positions

Short trading is a bit more advanced tactic that requires the price to fall in order to make profit. On Stock it’s made by borrowing some amount of shares, but trading on Forex doesn’t require that. The liquidity rates allow you to sell your savings quickly before the price falls and then buy them back after the fall with little problem.

  • CFDs and options

CFDs and options are types of a contract that allow you to buy or sell some amount of an asset for the value mentioned in this very contract. However, while CFD is an obligation to do so, an option if just a right – you may or may not do so if you wish.

Both Forex and Stock allow this type of investment. There are no real distinctions between the two, barring the type of asset.

Leveraged trading

Buying on margin, also known as leveraged trading – is an outstanding type of investing that should be acknowledged separately due to its popularity. The margin rate is the key metric in this type of trading.

While buying on margin, you borrow some amount of money to conduct the purchase. But often you’ll still have to invest some portion of money yourself, and the ration between the borrowed money and your investments is a margin rate.

As a rule, Forex market is given wider margins by the brokers. The usual rate is 1:10, but you’ll often encounter 1:50 rates or more. Some brokers go as far as 1:1000 and beyond. Naturally, such rates are conjugated with great risks, because in case of a failure, you’ll have to return all the borrowed money.

In summary

In the matter of picking Forex versus Stock, there’s no clear winner. Obviously, Forex has more natural liquidity, cost-effectiveness and other favorable parameters, as well as bigger margin rates (which shouldn’t be underestimated). However, these two are virtually the same. There are no practical surprises, and your trading style won’t change by switching between the two.

What will switch is the list of metrics you’ll have to monitor. If you, like many other people, understand country-related metrics better than specific company-related effects, then you’ll fit into Forex trading very well.

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