The difference between forex and stocks (similarities and differences)
The main similarity between forex and stocks is that they are two financial markets, but nevertheless the difference between them is very clear. Forex is the process of trading currencies, while stocks is the process of buying and selling shares of companies. Both are used as a way to generate returns by traders, and to fund future projects by various companies, but there is always a difference in the amount of trading in forex compared to the stock market. According to the data, forex trading volume is around $7 trillion, while stocks are a little behind because it is not a single market. This article will tell you everything you need to know about the difference between forex and stocks.
Comparison of forex and stocks
In order to compare forex and stock trading, we need to take a look at the fundamental and technical aspects of these two markets. There is a very easy way to describe it in one sentence: Forex and stocks are technically similar, but fundamentally different.”
What this means is that usually the way people trade these assets, or the way they craft strategies is very similar, but the assets themselves are very different. This is especially the case when it comes to talking about centralization.
Centrality is a measure that tells us how much of one thing is in one place. When it comes to forex, we can easily say that it is not very centralized. Each country has a national bank that holds plenty of reserves of its own currency as well as foreign currencies, which makes the forex market more diversified.
Stocks are shares of companies belonging to a particular country. For this reason, they can only be registered on local stock exchanges officially, but they can sell their shares abroad as well. Each stock exchange can be ranked based on the number of shares of large companies it sells which makes it more centralized.
Centralization is one of the reasons why Forex is better than stocks, but most traders do not pay much attention to this detail and do not consider it a huge advantage.
Advantages and disadvantages of forex
Advantages:
- decentralization
- Better liquidity
- Easier access for beginners
- Chance to get bigger payouts
Negatives:
- hard to understand
- Complex
- Very responsive to politics
- Limited options
These are the main advantages and disadvantages that beginners as well as experts consider when comparing forex to stocks, but it is certainly not a complete list. Here is a simplified explanation of these points:
Decentralization: Unlimited participation of people in the market. If you place an order in US dollars in Euros for example, you are not necessarily limited to buying from people who are close to you only, but you can fulfill the order by anyone even if they are in another continent.
Better Liquidity: Liquidity means how quickly something can sell. Let’s say you’re trying to sell a phone and a house. In this case, the phone will have more liquidity, simply because there are more people willing to buy it.
When we talk about forex or stocks, we need to think about how many people like to “buy for cash”, and how many people like to buy stocks. This is what contributes to the high liquidity that forex enjoys.
Ease of access: When people start trading, they usually look for a broker, who usually requires a deposit for their services. Forex brokers require much lower minimum deposit than stock brokers, which is why getting started with forex trading is usually easier.
Opportunity for Bigger Payouts: Traders usually have the opportunity to make more with less when it comes to forex, due to a tool called leverage. Although stock trading also has leverage, Forex usually has more leverage. This gives traders the opportunity to generate more payments with smaller deposits and is a very important difference between forex trading and stock trading. Check out the Leverage in Cryptocurrency article which will provide you with a detailed explanation of this concept.
Advantages and disadvantages of shares
Advantages:
- Diversity
- volatility
- Long term investments
Negatives:
- High entry barrier
- More dangerous
- time consumption
These are the main advantages and disadvantages of the stock market, here is a detailed explanation of them:
Diversity: What this means is that there is a lot more choice with stocks than with currencies, there are thousands of companies listed on exchanges that can be traded, and thousands more to be listed soon. This is why the forex versus stock argument is not debatable when it comes to diversification.
Volatility: Volatility is a measure of how much an asset’s price has changed. If the price changes every day by a significant amount (10-100+%) for example, then it is considered highly volatile. But if it stays at the same price or increases or decreases at a very slow pace, it is considered low volatility. The volatility of stocks is much higher than the volatility of currencies, which is why traders usually get better profits from their trading.
Long-term investments: Stocks are usually bought as long-term investments, that is, they are bought and held for months, years, or even decades. Although stock prices change quickly, holding on for a long time usually leads to a better payout.
Which is better, forex or stocks?
Each of these financial markets has advantages and disadvantages, but that does not mean that it is difficult to choose. Most beginners usually boil down their choices to the options below:
Stock:
- easy to predict
- Better chance of increasing payments
- The opportunity to influence the market further
Forex:
- Easier for beginners
- more stable
- faster strategies
However, these preferences are usually very subjective. Just because you find a financial market easy or familiar to use, it does not mean that it is for traders as a whole. The most common strategy is to try both markets first and then make a final decision.
Frequently asked questions about the difference between forex and stocks
Why trade forex instead of stocks? In terms of the difference between forex and stocks, forex has clear advantages. Traders are usually given about 1:5 leverage with stocks, while forex traders can get up to 1:1000 on some platforms. However, this does not mean that leverage is an easy tool, but rather it has very high risks as well. Check out the Risks of Leverage article to learn more
Which is more dangerous? Risk is usually calculated based on the volatility of the asset, and given the high volatility of stocks, more and more traders agree that stocks are riskier. However, it all depends on the strategies and mindset you use when entering any of these markets. If you enter without knowledge, experience or tools, it is very likely that you will lose more than you gain. Don’t think that just because one asset is riskier than another, you will be safe with the less risky asset
Why are stocks more familiar than forex? We all know what currencies are, right? Especially the ones we use on a daily basis. But we don’t necessarily know all the details of what affects the exchange rate. In contrast, stocks are easier to understand. Has the company you’re investing in grown in the past year? Well, this means that this year they will try to beat last year’s results more seriously. This usually gives traders an idea of the future of companies and makes it easier for them to to predict what might happen to them. But let’s see things from a slightly different perspective. Let’s say you love Japanese cars and invest in a company like Toyota. You know exactly how people react to new models because you are one of their customers. But you soon find out that many countries will ban cars with wheels Steering on the right side. This means that there are a group of countries that will stop importing the car, and therefore fewer of them will be sold. This also usually means that their Toyota price will drop, and you’ll have to get rid of them quickly to avoid early losses
Why do stock brokers require a larger minimum deposit? The difference between forex and stock brokers is that they look at their clients differently. A forex broker sees his clients as traders, while a stock broker sees them as investors. When comparing forex brokers to stock brokers, the former usually knows that their clients will get a lot of trades during the day, so they allow smaller deposits because commission fees are more frequent. As for stock brokers, they know that the frequency of their clients’ trading is relatively lower, which leads them to request larger deposits.
I have been trading forex for a while now, will it be difficult for me to switch to stocks? Technically, this is not difficult, but you will have to adjust to the new swings. Prices in the stock market change a lot compared to forex, and this is what prompts most traders to follow a long-term strategy rather than a short-term strategy when it comes to stocks. Additionally, rearranging the sources from which you get your information may also be a requirement of this shift. Because the websites or experts who talk about currencies, they don’t necessarily devote much time to other industries or the economy in general. Most of the traders apply their forex strategies to stock trading and end up losing in the beginning. But this is an order Normal, as traders adapt to their new patterns as they grow and gain experience.
Should I only trade local assets? People who trade only domestic assets are usually slightly more successful than those who trade international levels. It is not recommended to trade exclusively local assets though, because you still need to diversify your portfolio.
Which one will teach me the most about the financial markets? Both forex and stocks have a lot to offer in terms of market knowledge, but they can also inform you about politics, economics, finance, and general issues that can happen in the world. When trading forex for example, most people tend to look for political news rather than news from separate companies. When it comes to stocks, traders tend to look for information about the particular industry in which they are investing. In general, the difference between forex and stocks in terms of education is largely related to the trading opportunities they offer.
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