Forex Vs Stocks: Difference Between Forex And Stock Market
Forex vs Stocks or the difference between Forex and Stock market will help you to decide which trading class is to trade.
When it comes to investing money, you have to choose the best one which will give you more profit.
However, both stock and forex trading are gaining their popularity day by day.
Both of these trading instruments are different from one other.
In fact, you can make the differences between these two financial instruments by its trading hours, rules, risk level, and so on.
In this article, we will cover the basic definition of the Stock market and the Forex market. Additionally, we will also compare these two trading assets.
What Are Stocks
Stocks consider as a financial instrument. It is one kind of equity or shares.
Investing in Stocks of a particular company will give you an opportunity to be an owner of a small piece of share.
It described as an ownership certificate of a certain company.
In order to grow a company, the owner needs to raise money. Therefore, the company decides to go public rather than operating the business privately.
The company offers ownership shares through the stock market.
Now the question is “What is a stock market?”
A stock market is a place where investors can buy and sell ownership.
Owning a stock will give investors the power to claim assets and the earnings of the company.
Holding a particular company’s share will make you the shareholder.
The trading term is similar for both the Forex and the Stock market. The main goal is to buy and sell stocks depending on the price movement.
If the investors think that the company earning will rise in the future then they will bid for the stock.
Stock can be owned by OTC or through a centralized exchange.
The owner of the stock can earn a profit in two different ways. One way is to buy the stock at a lower price and sell it at a higher price.
If the company does not do well, then the stock price will go down.
Receiving a dividend from a company is the other way to get a profit. The dividend is paid by the company based on the earnings.
It is compulsory to know that stockholders are the real owner of the company.
The dividend is paid quarterly to the stockholders. The company’s board of directors pays a reward to the stockholders in this way.
When investors buy any stock or equities, it does not mean that they will buy from a particular company.
They usually buy from other existing stockholders.
On the other hand, when they sell stocks, they do not sell back to the company. They sell them to some other investors.
Stocks are mainly for those companies which are profitable but growing slow.
What Is Forex Trading
Forex trading is a process to exchange of one currency to another currency.
Another name of Forex trading is foreign exchange.
If you collaborate with the complete global share market, it cannot be possible to beat this amount.
The foreign exchange market assists international trade and investments by enabling currency conversion.
Forex market is the place where traders buy and sell currency pairs. You can trade Forex 24 hours a day; even at the weekend.
Globally, the Forex market is decentralized. On average, the trading volume is approximately $5 trillion per day.
Moreover, currency markets give traders an investment opportunity.
The main participants of Forex trading are:
- Financial Centers
- Import- Export business
- Large International Banks
- Multinational Companies
Via the OTC market, above participants along with the traders and investors buy and sell world currencies.
Forex Vs Stocks Market - Types Of Stocks
There are two types of stock trading available in the market. These are:
- Common Stock
- Preferred Stock
Each type of stock carries unique features for the stockholders.
Common Stock
Common stock is widely accepted throughout the stock market. Stock represents the ownership of a company.
So, stockholders collect their profits with the help of dividends. You will find the price of the stock through online, newspapers, and other financial publications.
Common stockholders have voting rights.
In the common stock, the profit may or may not be distributed through the dividend to the traders.
Moreover, common stock is riskier than preferred stock.
The majority of stocks are issued by the terms of common stock.
Preferred Stock
Preferred stockholders have no rights to vote, but they have some level of ownership of a company.
Traders can consider the preferred stock as a bond.
On the other hand, the dividend portion is higher than common stocks.
For this type of stockholders, the dividend amount is fixed. Before paying the common stockholders, it is mandatory to pay preferred stockholders.
The main advantage is that the company can re-purchase stock from the preferred stockholders.
Apart from these, the company can issue different classes of stocks to raise voting power.
Different classes of stocks offer different voting rights. You will find many companies, which prefer dual-class systems to get profit along with a high vote.
Forex Vs Stocks Market - Types Of Forex Or Currency Pairs
Mainly, currencies are traded on Forex. So, in the Forex market, traders perform trade with the help of currency pairs.
In the Forex market, traders will deal with two currencies at the same time; Base currency and Quoted currency.
There are three types of Forex currencies:
- Major Currency
- Minor or Cross-Currency
- Exotic Currency
We will describe all types of Forex currencies one by one below.
In the currency market, major pairs are traded frequently.
The amount of spread is the lowest.
These currency pairs are more liquid than other pairs.
More than 85% of the trading transaction takes place with the major Forex pairs.
Major pairs hold the world’s leading currencies that are traded the most.
For example EUR/USD, USD/JPY, AUD/USD etc.
The other name of the minor Forex pair is a cross currency pair. This pair does not contain the US dollar. Those pairs that are comprised of EUR, yen or British pound are widely traded into the Forex market.
The most-traded minor currency pairs are- EUR/GBP, EUR/CHF, EUR/CAD, GBP/JPY etc.
Exotic pairs are mainly a mixture of one major and one exotic currency.
Developing counties currencies are considered as exotic currencies.
The spread is also high for exotic pairs.
Due to the high transaction cost, traders as often avoid trading exotic pairs.
Example: EUR/TRY, USD/HKD, etc.
Trading Hours of Forex And Stock Market
You can trade Forex 24 hours from Monday to Thursday. The trading market is not centralized.
Forex market open time depends on the trading zone or session.
There are four major trading sessions. These are:
- Sydney Sessions
- Tokyo Sessions
- London Sessions
- NY Sessions
You can find detailed information on trading hours in our Forex trading hours and timing article.
In stock trading, you can only invest in the stock market when the stock exchange is open.
Remember, the stock market is centralized.
Stock market open time for NASDAQ and NYSE are at 9:30 AM EST and close at 4:00 PM EST.
Pre-market trading starts from 4.00 AM to 9:30 AM EST and in the after hours the market starts from 4.00 PM to 8:00 PM EST.
Differences Between Forex And Stock Market
Investing in the stock market is a wise decision for investors.
When it comes to the trade then, I will choose Forex over the stock market.
The forex and the stock market are quite similar. The price fluctuates depending on the supply and demands.
However, there are a few differences between the two markets. I will describe them one by one.
Forex market is the market of 24H trading. There are also overlapping trading session when the market remains more volatile.
The stock market usually operates for 7-8 hours. The stock market has three trading sessions. We already mentioned the trading hours in our previous point.
The forex market is the independent market that is totally opposite of the stock market. This is called the Over the counter (OTC) market.
Forex market is running their trading according to the trading locations, regulations, and other factors. The stock market is centralized and regulated.
The volume of the traded amount is higher in the Forex market than the stock market. The market volatility is also high in the Forex marketplace.
The stock market is limited by market volume, the country of origin and the market activity. In the NYSE stock exchange, the daily turnover is more than $50 Billion.
The stock market requires a broker to invest money into the market. This results in a financial friction into the market.
Brokers will get a minimum fee in the Forex market. Most brokers do not charge additional fees from the traders.
The stock market commission is high. The traditional stockbrokers ask for the commission on top of their spread.
In the Forex market, you will get the facility to trade with the platform without depositing money. The demo account facility helps traders to know more about the platform. In the stock market, this is not possible for traders.
In the stock market, the leverage is normally around 5:1 or 50% of your available equity. On the other hand, the Forex market leverage is more than ten times higher than the stock market. The margin amount is low and the leverage is high in the Forex trading.
As the Forex market is traded over the counter, traders have the opportunity to trade the market instantly. In the stock market trading, you need to wait for the order to get executed because of the broker in between the trade.
Some people think that the Forex market is more complex than the stock market. You need to analyze the market with so many formulas and trading strategies. The stock market is simple as it is.
The Forex market is simple with some trading pairs. The most traded pairs are the major pairs.
This makes the trading market simple. In the stock trading, you will find millions and millions of companies.
The Forex market is riskier than the stock market. The losses in the Forex market are smaller compared to the stock market.
The stock exchanges are regulated and limited in quantity. Forex trading is less regulated.
To trade a stock, you must have knowledge about the world market, stock, bonds. You need to follow professional to buy or sell stocks. In the Forex market, you must be aware of the Forex pairs valuation, Financial and political news, and other factors.
Trading stock usually requires bigger capital than trading Forex. It is easier to enter the financial market when you trade Forex. For example, to open a stock margin account in NYSE, you need to have at least $2000 capital.
In the Forex market, there is no restriction of the short selling, since another trader buys the currency simultaneously. In the stock market, there is a restriction over the short selling and the stop order.
There is no formal exchange in the FX market, however, the trader will find the exchange floor for each listed security in the stock/equity market.
In the stock market, some companies fail without any notice whereas, in the foreign exchange market, the major currencies will not fail.
The Forex market is only concerned with currency pairs. The stock market concentrates on the stock and it is difficult to track a single stock from a large collection of stocks. The stock market is also has different trading positions.
Similarities Between Forex And Stock
There are a few similarities between Forex vs Stock market.
These are:
Both the financial market charge a fee trading. Forex brokers usually accept spread rather than the commission fees. The majority of stockbrokers implement a per-trip fee of less than $10 for standard accounts.
You need analytical tools to analyze the market of both trading assets. These tools are like technical analysis, fundamental analysis, historical data of the stocks and forex pairs, central bank interest rates and others.
Traders face psychological challenges whenever they trade Forex or stocks. Greed and fear can lead you into big losses. You need to train your mind by avoiding greed and fear.
Final Words
The stock market is attracting investors with its unique features.
On the other hand, the forex market is popular for its instant reward.
Some traders get confused after looking for a market to trade. My recommendation is to go with the one that works best for you.
Try to trade both financial markets by dividing your available capital into two accounts.
Remember, at the end of the day, the most profitable trader is one who can masterfully manage risk.
