It is probably the first question a beginner faces when deciding which market to enter. Forex and stock markets are on everyone’s lips, but which would make a better choice for you? The answer depends on many factors, including the amount of risk you can comfortably bear and your trading style.
Let’s have a closer look at each of these markets to weigh their pros and cons.
Forex and Stock Markets: Main Differences
Forex (FX) stands for Foreign Exchange. As the name suggests, the participants of this market seek to make money buying and selling currency pairs. For instance, you open an Up trade on EUR/USD when the euro is weak. If the pair grows on encouraging economic reports from the EU, you may close the trade and pocket the difference between the starting and closing prices.
Interestingly, some big Forex brokers offer additional profit-making opportunities to their clients. For example, Olymp Trade, one of the biggest platforms for FX trading, lets you capitalize on stock market movements, too. You can do it using the Stocks mode in the platform’s mobile or desktop trading app.
The stock market allows you to buy and sell shares in the ownership. Many companies go public to raise funds for further growth. For example, If you have enough money, you can become a shareholder of Google or Apple by buying a share of their stock on the Nasdaq Exchange, where they are listed. If the company does well, you can sell your share to lock in profits.
Now, let’s see how these two markets are different in terms of size, liquidity, risks, profitability, and other parameters that may influence your choice.
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Which Market is Bigger?
Forex is the largest financial market in the world with its daily trading volume of more than $6.5 trillion. Now, it’s worth a staggering $2.4 quadrillion.The total value of the stock market by the end of 2020 was about 93.7 trillion. Its average daily volume is around $200 billion. Compare the difference.
Size is important because it affects a market’s liquidity. Considering its volume, Forex offers extremely high liquidity compared to any other market. Here, a huge number of buyers and sellers are engaged in trading at any moment of night or day.
Liquidity and Volatility
High liquidity on Forex means that you buy or sell currencies quickly and without big price fluctuations, no matter the volume of your trade. Major currency pairs like EUR/USD or USD/JPY have higher liquidity than minor or exotic ones because they are the most widely traded.
In the stock market, liquidity varies greatly depending on your chosen stock. Large cap stocks are much more liquid compared to less popular ones.
In general, the price dynamics of currency pairs depends on a wide range of factors relating to at least two economies. These factors include economic data releases, election results, political agreements, monetary policy decisions, etc.
Stock prices also react to the macroeconomic situation and domestic politics. Additionally, they are affected by the news related directly to the company: earnings reports, new product launches (or launch delays), mergers, regulatory problems, lawsuits, major contracts, etc.
Regulation: Centralized vs Decentralized
Unlike the stock market, Forex is decentralized, meaning there’s no central institution to control and regulate it. However, there are supervisors like The Financial Commission setting standards for the industry and auditors checking brokers’ performance for signs of unfair practices. When choosing a Forex platform for trading, make sure it abides by these standards.
As for the stock market, the activity of its participants is regulated by the authorities of the countries of their operation. In the USA, it’s the SEC (The Securities and Exchange Commission). In India, it’s SEBI (The Securities and Exchange Board of India). The tightness of regulation may vary considerably across jurisdictions.
The lack of strict requirements on the FX market may be a big pro for aggressive traders looking for unlimited profits. For instance, such traders can benefit from significant leverage to increase their potential returns. When you buy and sell shares on a stock exchange, your opportunities to use borrowed money are much more limited.
It’s important to remember that this sword is double-edged. Bigger potential rewards go hand in hand with increased risks. Make sure the Forex environment agrees with your risk and stress tolerance.
The FX market is open 24/7. As trading does not happen at one central location like a stock exchange, it doesn’t depend on its schedule.
This around-the-clock availability makes Forex convenient for traders living in different time zones or working irregular hours. Technically, this market never sleeps. However, some hours are busier and offer higher liquidity than others. Depending on your preferred currency pairs, you should trade during the New York, Sidney, Tokyo, or London trading session.
As for stock traders, they should adhere to the schedule of the exchange where the company is listed. When these institutions are closed due to holidays, you stay idle for several days in a row. Though you may take advantage of extended trading sessions, these hours usually offer much lower liquidity and trading volume. Therefore, your opportunities to earn money are limited.
One of the major attractions of the Forex market is its low entry costs. Many beginners think they need significant capital to become a trader, but it’s an outdated view. In the case of Forex, you can start with as little as $10. This amount lets you trade on any available instrument, though the risks are high.
The stock market is usually more expensive to enter, especially if your aim is to buy individual stocks of companies like Apple (>$160) or Tesla (>$870). Though it’s also possible to enter this market with $10, your potential profits are much smaller due to the limited leveraging opportunities. On the other hand, your risks are lower, too.
If you investment capital is not big enough, consider buying a small portion of stock. Some online brokerages offer your to invest in fractional shares. It might be an suitable option for a cautious newbie.
Forex or Stocks?
As always, the answer depends on if the benefits of each market overweigh its drawbacks for you.
Forex with its high degree of freedom, low entry costs, leveraging opportunities, and 24/7 availability, looks very attractive to an ambitious short-term trader ready to operate in a rapidly changing environment. It’s essential to bу aware of all the risks and know how to keep them under control.
The stock market welcomes aggressive traders, too, but they need bigger capital to make significant profits. On the bright side, this heavily regulated market offers a safer environment for beginners. Besides, stock market is better suited for people with longer investment horizons.
Hopefully, now you have a better understanding of what to choose. Good luck!