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Forex vs Stock Trading: What's the Difference?

Posted by BluFX

 

Forex vs Stock Trading

Forex vs stock trading: what's the difference between the two? They can seem like very similar markets, but there are several key differences. We do some investigating...


Trying to balance trading with your day job? Here's how to find forex strategies to suit your schedule... 

Read: How to Find Forex Strategies to Suit Your Day Job ⟶


Forex vs Stock Trading: Which is right for you?

 

Stock

Forex

Liquidity

Less liquid

Higher liquidity

Volatility

Less volatile

High volatility

Leverage

Less leverage

Higher leverage

Scope

Hundreds of asset classes

A handful of major currencies

Time

Limit your trading hours

No limit to trading hours

Market conditions

Benefits from bullish markets

Benefit from both bullish and bearish markets

 

"40% of all behaviour is genetic, and 60% is learned - which is good news, because if we’ve learned something, we can unlearn it to learn a better pattern of behaviour." Read our Q&A with trading psychology coach Mandi Rafsendjani here>>

Forex vs Stock Trading: Key Differences

Markets move faster in forex than in stocks

Forex trading entails exchanging one currency for another. Short-term traders frequently look for high liquidity in a market because it allows them to buy and sell an asset quickly. When the prices of these assets fluctuate relative to one another, as they invariably do, traders can profit from the price change.

Currency price movements on a large scale may be beneficial to short-term traders. Forex is far more liquid than stock options. There is more activity when there are more buyers and sellers, which generally means a better selection of currency pairs to trade.

Furthermore, forex trades are typically settled in two days or less, so you will not have to wait long to learn the outcome of your trade. When it comes to stocks, the settlement period can last several days after the trade is placed.

The most significant distinction between forex and stock trading is volatility and liquidity. Long-term investors will favor a stock's value and stability, whereas forex traders frequently look to profit from a more volatile market.

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Forex has higher leverage than stocks

Leverage in forex refers to the use of borrowed funds to make trades, also known as margin trading. Forex traders have access to a lot of leverage that stock traders do not. With the leverage of up to 500x, traders can move the market with much less capital than other markets. Traders must be willing to accept leverage and understand the risks involved.

Brokers provide excellent leverage, but please exercise caution. Historically, a standard lot size for forex trading has been 100,000 units of currency. While the size of the orders has been reduced, leverage remains a tool for multiplying your gains.

Because forex has more leverage than stocks, checks and balances are in place to ensure that brokers lend money responsibly. Regulation T was established in the United States. This means that short-sellers must have 150 percent of the stock's value in their margin account. At the time of sale, 150 percent of the purchase price must be held in a margin account.

In contrast to the stock exchange, where leverage requires 150 percent of the stock's value, leverage in forex can be as high as 20: 1 with reputable brokers.

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Forex is a 24-hour market

In some ways, the forex market operates around the clock. Although most market hours are between 9:30 a.m. and 5:00 p.m., time zone overlap allows for global trading 24 hours a day, five days a week. Because of the longer duration, global traders can take advantage of changing market conditions at their convenience.

Some of the most popular times are London's 08.00-16.30 sessions and central 8.00-16.00 sessions, which overlap with Tokyo and New York sessions. Exchanges around the world follow their own schedules, with some closing for lunch, for example. With forex, you have more flexibility regardless of your personal preferences or the current time.

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Stock trading features thousands of stocks, while forex has a few major currency pairs

The forex market offers a few major currency pairs where traders can make a high volume of trades and generate a healthy profit. The most popular pair is the EUR/USD, followed by GBP/USD. Both of these currencies are considered to be generally stable and provide excellent margin trading opportunities. On the other hand, thousands of shares are traded every second throughout the stock exchange market. Here you can trade on everything from technology stocks to pharmaceutical companies.

The stock market has several high-profile indices, including the Dow Jones Index and the S& P 500. Due to the extremely sheer number of stocks or shares available, most traders find it easier to trade a small number of well-established currency pairs.

If you want to trade stocks, ETFs are a great place to start. Unlike spread bets and CFDs, which do not provide ownership, ETFs hold the original assets (stocks) and operate similarly to shares. They're also more cost-effective and tax-efficient because they're listed on exchanges, eliminating the need for a middleman. ETFs are a fantastic product for those looking to open long-term positions in the stock market. They provide many advantages without requiring you to keep track of individual stocks and their related costs.

Want to know which currency pairs to trade? See 5 best currencies to trade - and here's why>>

Forex gives you the power to profit from both upward and downward market movements

When the economy is weak, investors become concerned and begin to withdraw their funds from risky investments. This has a knock-on effect throughout the stock market, as investors panic and sell their shares for whatever they can to get their money back. The economy begins to decline and then begins an upward spiral that will take years to recover from. Forex can grow in both good and bad economic times.

Since bad economies may offer more opportunities than good ones, many forex traders believe that "the bigger the disaster we're in, the better we'll do." When a forex trend is in play, you can profit not only on upward but also on downward trends, doubling your chances of making money.
Forex pairs are unique in that you can profit from both up and down market movements. This is obviously a massive benefit to forex traders. 

Read What is the Average Trader Salary? ⟶

Tags: Trading Tips

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