Despite the fact that we often consider forex trading similar to stock trading, both are very different in nature. For one, forex or currency trading is considered to be quite easy to deal with and even a newbie can trade in this industry.
Before you can directly dive into decision making it’s better for you to understand both terms. Let’s start with simple definitions.
What is Forex Trading?
The term is basically a derivation from the foreign exchange market. This marketplace is the trading zone where you trade in foreign currency for another currency. The purpose of this trade could be an international business deal, tourism, earning profits, etc.
What is Stock Trading?
Stock or share trading is simply the acquisition or selling of shares of a particular company. By acquiring or buying shares of a company you get an entitlement to own a company. But only to the extent of the percentage you hold.
The key purpose of buying shares (especially for an individual trader) is to earn profit.
Now that you have learned definitions of the two terms, let’s dig deeper and find more about forex and stock trading.
Key differences Between Stock and Forex Trading
|Stock Market||Forex Market|
|Low volume||High Volume|
|Less liquid||High liquid|
|8 hours market||24 hours market|
|Commissions||No or less commission|
|Wide focus||Narrow focus|
According to an analysis, the daily trade volume of the forex market is $5.1 trillion making it the world’s largest financial market.
On the other hand, the stock market’s daily trade volume is just around $200 billion.
Due to high trade volumes, the forex market is considered to be highly liquid. In layman’s term, liquidity means the availability of assets in a market. Due to its high volume of trading, the forex market is more liquid than the stock market.
Due to its importance, the forex market is in operation 24 hours for 5 days a week, worldwide. You can trade in this market without having to go to an exchange in your area.
Whereas the stock market usually operates for 8 hours only and is closed on the weekends. However, you’d also trade the stocks online using different trading mobile and web applications.
Usually, the forex market is free of any commission structure. The currency exchanges make their margins in the buying and selling rates.
Whereas the stock market usually runs on a commission as well as margin-based rate. However, eToro is one broker with a limited offer of 100% stocks, 0% commission.
The main focus of the currency market is on theses pairs; EUR/USD, USD/JPY, GBP/USD, and AUD/USD. Whereas, there are thousands of stocks where you could trade. So to understand these or to find the best stock, you need to study a lot. And be able to understand the financial statements of a company.
Where Should You Trade?
Now that you’ve grasped the basics of both markets, the decision is up to you where you want to trade.
One last key thing prior to making your decision is to understand your goal of trading. Is it for a short-term, medium-term, or long-term goal?
To understand each goal plan, let’s look at the basics of each.
|Trade Term||Definition||Reasons||Trade Option|
|Short||Here we can define this term to be a trade of an asset (stock or currency) in just minutes.||Rates fluctuating in seconds|
No need to research past trends
No need to understand financial terms
|Medium||A trade of an asset for usually a period of several days||For stock trading, you would need to have some knowledge of company’s past trend in its share value and be able to understand financial statements||Forex and Stock, both|
|Long||The period of long-term investment goes from months to years||Less time spending on analyzing and understanding the financial statements|
Gives an opportunity to be more prone to risk and take investment decisions in other long-term opportunities as well.
But be certain to work more on making a decision. There are plenty of websites and mobile apps where you can trade in both markets and not all are authentic or as good as some are. I’ll cover some stock and forex trading related apps soon.