Trading Forex vs Stocks – Which market to choose?
In a world full of options and numerous trading possibilities, it can be hard and sometimes frustrating to decide which market is best to trade. Especially, with so many online brokerages available just a few clicks away, the choice is becoming more and more difficult.
Most brokers offer traders with a variety of markets. We at Fondex, for example, offer online trading across 7 markets including Forex, Stocks, Indices, Precious Metals, Energies, ETFs and Cryptos. Moreover, our Contracts for Difference (CFDs) portfolio consists of over 1000 available financial instruments among the aforementioned categories, allowing you to create a diversified investment portfolio.
It is common knowledge that the most popular markets to trade are the Foreign Exchange marker, or Forex as we know it, and the Stock market. These are the ones that most beginner traders choose during their first steps in trading. Experienced traders tend to also go for them due to various reasons, such as these markets’ greater availability among brokers, a potentially higher leverage on offer, the possibility to trade them around the clock, deeper liquidity and many more. In this article, we will be focusing mainly on these two markets – Forex and Stocks – analysing their differences, mainly focusing on the following 5 categories:
1. Tradable instruments
There are many differences between Forex and Stocks, one of them being the most basic one that we find among the two markets – the available tradable instruments on offer. The Forex market consists of major, minor and exotic currency pairs. As you understand, with over 170 legal currencies circulating all over the world, the pair combinations can be endless. Compared to the majority of brokers that offer investors access to approximately 40-50 Forex pairs, Fondex offers over 80 different currency combinations. Although there is a plethora of Forex pairs, traders tend to favour the major ones, with them forming a staggering 72% of the overall Forex volume.
Similar to Forex, the Stock market consist of thousands of stocks, with only the New York Stock Exchange having 2000 company shares listed. The top eights stocks that traders choose, make up for less than 20% of stocks volume, clearly showing that a traders’ focus when choosing stocks is more widely spread.
Hence why, when traders come to decide on a market, they may feel that Forex gives them a more “contained” space to trade on, compared to Stocks, since the 8 major and most widely-traded pairs are easier to keep a track on. On the other hand, stock traders may feel that they have more opportunities in the stock market. Another point of view is the analysis needed when trading the Forex and the Stock market; in Forex, traders need to pay attention to the economic and government news of both pairs, whereas with Stocks, they are more concerned on the particular company and not the whole stock market.
So, at the end of the day, it depends on the individual and what they are looking for when trading and how deep they are willing to go in terms of their analyses.
2. Liquidity & Spreads
Liquidity represents the ease at which an instrument can be bought or sold in a market, and is closely linked to a market’s trading volume. With the Forex market outperforming the Stocks one by trading roughly $5 trillion per day, it is clear that its size is much bigger. Such high volumes mean higher liquidity, and although the Forex market liquidity can fluctuate during the different daily sessions, Forex is undeniably the most liquid market to date.
On the other hand, the Stock market sees fewer trades per day, but shares are still easy to access and trade. Especially the very popular stocks, such as Apple, Microsoft and Facebook are the most liquid ones, and as traders move away from the so called “blue chip” stocks, liquidity starts to lessen.
High liquidity also leads to tighter spreads, meaning a smaller difference between the bid-ask price of an asset. That’s why the major Forex pairs have so tight spreads, whereas Stocks don’t, with the exception of the most popular ones that often have pretty tight spreads.
Another difference between the Forex and Stock market is volatility. With Forex being the most widely-traded market, this ease at which it can be traded makes it more volatile. The last number of daily trades can indeed cause prices to show extreme changes during the day. Furthermore, the Forex market is highly affected by political and socio-economic events, which may bring drastic and sudden price movements.
On the contrary, the Stock market is more stable in terms of being affected by events and shows a more solid price pattern overtime. Not to say though that it cannot be affected by events at all – we only need to go back in March 2018, when the Dow fell sharply due to Donald Trump’s trade tensions with China. In general though, taking out some special instances, the Stock market is indeed less volatile.
Trading volatility can possibly provide opportunities for traders, but it also comes with an increased risk. Whatever the market, either being Forex or Stocks, traders will always need to take their protection measures in order to minimise the majority of risks and protect their trading activity.
4. Trading Hours
Yet another difference between Forex and Stocks is found in the market trading hours. Forex trading is taking place around the clock, 24/5, during Forex trading sessions. The main sessions in the Forex market are the New York, London, Sydney and Tokyo ones. Although the Forex market is closed on the weekend, being open 24 hours over the weekdays makes it possible to trade even at midnight.
The Stock market on the other hand is open only during the times when a stock exchange is open, normally between 9am and 5pm local time. Should a trading opportunity occurs outside of the stock market trading hours, traders need to wait for the stock exchanges to open in order to place a trade. This considerable difference between the Forex and Stock market in terms of their operating hours gives a considerable advantage to Forex compared to trading Stocks.
5. Leverage & Margin
Last, the final point we will be touching on in our comparison journey between Forex and Stocks is leverage and margin. In this area, Forex seems to outperform Stocks, since currencies can be traded on much higher leverage. During their research, traders can often find brokers who offer leverage of 1:200, 1:400 or even 1:500, meaning that they can open much bigger positions. European regulation restricts leverage for Forex up to 1:30.
With Stock CFDs being traded on margin, the situation is completely different since leverage can be up to 1:20 in certain countries, whereas the EU law restricts it to up to 1:5. As a result, the higher leverage in Forex gives traders the opportunity to open bigger positions, potentially resulting in higher profits. But let’s always consider the risks involved and understand that proper order management and thorough analysis are key.
Before we close this article, let's also briefly touch on the costs of trading Forex and Stocks, with tax being an important topic among traders. Forex and Stocks get taxed the same, as it also happens between futures and options. Tax systems don’t care whether you are buying or selling a currency or a share – they only care for your profits or losses. Tax charges vary among countries so please advise their respective laws during your research.
So, there you have it! All major differences between Forex and Stocks! Two different markets, allowing for different trading activity and opportunities. Which one would you prefer to trade? Are you a Forex trader or an avid Stocks connoisseur? Whatever it is, trade it on Fondex cTrader!
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