Forex trading is buying and selling of currencies in the hope of making a profit out of the transactions. On the other hand, stock trading is buying and selling of a corporation’s shares of stock to gain profit.
To compare forex trading and stock trading, one has to look at the many factors that affect these investment vehicles. These investments have similarities and differences when it comes to buying and selling.
Similarities and Differences
Both types of trading depend on technical and fundamental analysis. These analyses help investors to form decisions whether to buy or sell, how much to invest and how long to withhold selling. In technical analysis, you study graphs, charts, and inflation indicators. These forms of data usually encompass price or interest rate changes in the market.
In fundamentals analysis, you look at the many reports to obtain a better understanding of what is happening in the market. As for stock trading, you analyze financial statements like balance sheets, income statement and equity statement.
On the other hand, forex trading fundamentals refer to the statistical and economic reports that a country releases annually. Examples of these reports are employment reports, Gross Domestic Product (GDP) and retail sales report. Fundamentals also include news events that affect a country and its currency price quotations. These events may either be international or local news.
Both forex trading and stock trading use the terms bid and ask price.
In trading stocks and currencies, transactions begin with an asking price. An asking price is a minimum price that a seller is willing to sell the commodities. Commodities in this context refers to the currencies or the shares. The bid price is the price that the buyer is willing to pay for the shares of stocks. It may be the maximum amount in a trading transaction.
However, in trading currencies, the use of bid and ask price is slightly different. In your point of view as a trader, the bid price is the same as the price that you are selling the currency. On the other hand, the asking price is the price that you are buying the currency for. In other terms, the bid price is the base price and the asking price is the quoted price.
In forex trading, currencies are quoted in pairs – always. A pair has a base currency and a quoted currency. Forex trading has six major currency pairs that you can choose from and opt to trade while the stock exchange lists thousands of companies.
Liquidity is the easy conversion of an asset into cash. Forex trading is more “liquid” than stock trading, due to its short-term nature. In addition, you can easily pull out your investment once you read bad news that might affect and create fluctuations in currency price.
You have to wait for the market to open before you can rectify your decisions. By then, your investment has the lowest or the highest value, depending on the news you have heard.
To compare forex trading and stock trading in terms of liquidity, you also have to consider other factors such as the type of investor you are, and your investment goals.
There are two market positions that are in use, the long position and short position. Forex trading and stock trading markets use these terms, but the usage is different.
In a forex trader’s point of view, long position refers to the buying of currencies and short position is the selling of currencies. On the other hand, the term long position in stock trading refers to the stocks that an investor owns. Investors who enter into a stock long position aim to profit from a bullish market.
A short position in stock market refers to an investor who sold stocks without really having an ownership over them. Investors who enter in a short position take advantage of a bearish market.
Trading hours in the forex market is twenty-four hours while the stock market is limited to the business hours of the broker. In forex, as one market closes, another market opens.
This flexibility in trading creates an opportunity for traders who have day jobs. The traders can enter into a transaction anytime that they are comfortable in doing so.
Leverage in financial trading is the buying power that a trader enjoys. For example, you open an account with a stockbroker for $50,000. To apply leverage, you can buy stocks worth of $100,000. This is a 2:1 leverage, where you can buy stocks twice the amount of your live account.
In forex trading, a trader enjoys leverage as high as 1000:1 or maybe even more, depending on the type of live account you opened. This is so because of the nature of FX trading. In order to experience the full effect of trading currencies, you have to buy in large lots. The spread in forex is so small that it has sometimes no effect in a purchase of $1000 worth of currency.
Leverage can be an advantage and a disadvantage, depending on the outcome of the trading transaction. It is an advantage if you can gain profit from your trading. However, the loss can be as great as the profit you might have earned if you make the wrong decisions. For example, if you gain 5-10% in trading forex, you lose the same percentage if you are not careful.
Despite the liquidity and flexible trading hours, forex trading is the riskiest among financial investments. You are dealing with the largest financial market. It is global. In addition, the market is partially regulated since it is decentralized. Unlike in stocks= trading, you are protected by the many government agencies that regulate the system.
Forex trading is more for short-term traders due to its volatility. Even though the spread is very small in amount, the leverage can augment that amount. You may not easily see the effect if you are dealing in amounts lower than a hundred dollars. Thus, you need to trade more than so you realize a certain profit goal.
To determine which is the best financial market for you, you have to compare forex trading and stock trading in terms of their advantages and disadvantages. In addition, look into the many factors that affect these kinds of trading markets. The factors mentioned above are just a few of them. Before making a final decision, make sure you have done every research you can do.