One of the best things about online trading is that users have instant access to literally thousands of different markets to trade at practically any hour of the day. However, with so many options at your ready disposal, it has become increasingly difficult to decide what markets you actually want to trade.
The good news is that various sites, including this relaunched forex trading site, have emerged in recent years that have given individual traders unparalleled access to the financial markets. In times gone by, you were usually limited to whatever options your personal trading and investment advisor presented to you – but these days, with the rise of online trading platforms, you can now feasibly trade any of the thousands of major markets out there.
In these circumstances, choosing what markets you want to trade is no easy choice. There is also a risk that if you spread yourself too thin across a wide variety of asset classes and instruments, you will expose yourself to too much risk. Similarly, if you become too specialized, you might miss out on opportunities to turn a profit. As such, knowing what markets to trade has serious consequences for your long-term trading success.
The two most commonly traded markets for retail traders are the stock market and the currency – or forex – markets. For many users, this is what the choice boils down to. How can you decide which one to trade though?
What are the ‘currency’ and ‘stock’ markets?
Before we discuss how to choose a market to trade, we should first be clear on what they actually are!
The stock market is what most people think of when they think of online trading. Also known as the ‘equities’ market, stocks are essentially ownership stakes in publicly traded companies that individuals buy and sell on the ‘stock market.’ By buying an amount of stock in a publicly-traded company, you have an ownership stake in that company relative to the size you bought it in.
On the other hand, the currency markets refer to the buying and selling of currencies. Also known as the ‘forex’ or ‘foreign exchange’ markets, currency traders use one currency – for example, the USD – to purchase a certain amount of another currency, such as the GBP. Most often, when currency traders buy an amount of currency in exchange for another, it is hoped that, at some point in the future, the currency they have acquired will have risen in value, which can then be sold for a profit.
What’s the difference between the currency and stock markets?
There are a number of fundamental differences between the currency and stock markets.
Firstly, the main difference is the size of the markets. The global daily trading volume of the foreign exchange market is worth around $5tn each day, as compared to the total value of the global equities market of $90tn. However, the daily trading volume of the equities market is only $200bn, which means that the daily trading of the forex market far exceeds it.
The difference in size between the two markets leads to the second main difference between them: liquidity. Liquidity essentially refers to both how active the market in question is and how easy it is to buy and sell on that market. Given the huge daily trading volume, the forex market is incredibly liquid, meaning that you won’t tend to run into any difficulties buying or selling currency on the live markets.
Which is the best to trade?
While this will ultimately depend on the skill and expertise of the individual trader, there are some differences between the two markets that make them more or less attractive.
Firstly, forex markets tend to have fewer costs and commissions associated with trades. While it is common practice to get charged commissions on stock trades, this is much less common for forex trading platforms. This is because forex brokers tend to make money by building in commissions into the prices you get offered, rather than charging you an upfront commission.
Another factor that will make it more or less attractive is the amount of options available. While there are hundreds of currency pairs ready to trade, only a small number of them will have a solid chance of turning a profit when traded by a retail trader. On the other hand, there are thousands of equities traded across a broad range of industries and sectors. Depending on whether you want a broad or more narrow focus, you may be drawn to one over the other.
Should I trade currencies or stocks?
As you might be able to tell from the above article, there is ultimately no easy answer to this. Both stocks and currencies have advantages and disadvantages. Ultimately, your answer will depend on what sort of trader you are, what level of expertise you have, and how much time you want to sink into learning the markets.