If you are an investor, the two terms that you may hear the most are forex and stocks. While these two investment types may seem very similar, it is important to understand the differences between them if you don’t want to end up with a confusing financial portfolio.
So, if you are thinking about signing up for stock or forex trading training, brush up on these basics, which will also help you decide which one you should go for.
What is Forex?
Forex is a global market where millions of traders from around the world are trading currencies at any given time. Forex, also known as foreign exchange and FX, is the trading of currencies.
In other words, it is the process of exchanging one currency for another at a given price. For example, an American trader could sell USD and buy EUR in the hope that the value of EUR might increase relative to USD when the trade is closed. The difference between the prices will then be deemed their profit margin.
The forex market allows traders to buy and sell currencies 24 hours a day, 5 days a week. And at $6.6 trillion, it is probably the largest, most liquid financial market in the world.
On any given day, currencies worth trillions change hands. You can trade on this market from anywhere in the world, which means that you can take advantage of a currency’s strength while you are away on a vacation or working full time at your desk job.
All this makes forex a great way for novice traders to get into the market.
What are Stocks?
Stock is a term used to refer to stocks of companies. It is a type of security issued by corporations or governments. It gives the owner partial ownership of that company or some form of stake in it. Anybody who buys a company’s stocks is entitled to a portion of the profits (dividends) and capital appreciation of the underlying asset.
Stocks are bought and sold on the securities market, and their prices fluctuate with the value of the company that they represent. That simply means, if a company is doing well, its stocks will go up in price, and conversely, if the company is not doing well, its stocks will decrease in price.
The stock market has evolved over the years and it is now a global system. The trading is done electronically through markets like the London Stock Exchange (LSE) that connect buyers and sellers.
Although the many crashes in history, such as Black Monday (1987) and the dot-com bubble (2000), have given stocks a bad rap, stock trading has long been considered a solid way for people to build wealth over time as it provides an ownership stake in a given business and thus helps provide some protection against inflationary pressures.
Forex vs. stocks: What’s the difference?
The forex market is huge, with a daily volume of $6.6 trillion, making it the largest financial market in the world, dwarfing the stock market by a factor of ten, which stands at a relatively insignificant $200 billion mark. It is also much easier to enter than many other financial markets because you don’t need to invest or trade large amounts of money to get started. But more on that later.
Liquidity refers to how easy it is to buy and sell an asset. If an asset has high liquidity, then you can easily buy or sell the asset whenever you want at a fair price. Forex and stocks have different levels of liquidity.
Because the forex market is so massive, you will always witness high trading activity on a daily basis. This means millions of people are buying and selling currency pairs every second. So, it is extremely easy to find buyers for your assets whenever you want to exit.
Liquidity in stock markets depends on stock exchange rules, which can also be subject to change upon government intervention and/or natural disasters or events like terrorist activities or political unrest in countries where companies are listed for trading.
Moreover, some stocks are more popular and desirable than others, so the liquidity will vary according to the stocks that you are dealing with. If you are trading popular stocks, you will always open and close quicker than otherwise.
Forex markets run 24/5 and are only closed during the weekends. Stock markets, on other hand, have definite closing times. You can only open or close a position during these specific time frames. In some cases, stock markets can even be closed for days due to natural disasters or national emergencies like war, which reduces their flexibility.
Forex has no central clearinghouse, which means that trades can be conducted with a broker of the trader’s choice. So, you are in complete control of the commissions you give out on your trades.
When you trade on the stock market, on the other hand, you must use a member of the stock exchange and this dictates who you can deal with and how long it will take to complete your transaction. Because of this centralised system, brokers usually charge a standard commission that’s quite high and can eat into your profit margins.
The forex market is more transparent as it is run by a global community. The same amount of information on currencies is available to every trader regardless of where they are trading from.
The stock market is run by companies that can choose to withhold information, as we have seen historically. There is less transparency, which is why traders are required to do more in-depth research before starting.
The majority of people can participate in the forex market because they are not required to buy large blocks of assets to get started.
Smaller investments are sufficient to see real results, making it possible for people with small budgets to participate in the market and potentially earn big returns on their investments. This is also why the forex market is perfect for traders to learn as they grow.
As you might have guessed, the stock market isn’t that flexible. You need to invest large sums of money to see measurable profits, so they aren’t ideal for beginners or small-time investors.
To better understand these critical differences, joining an educational platform like that offered by Guerrilla Trading – a key provider of Forex trading training – is an incredibly beneficial way to develop your career and knowledge as a trader. Plus, you get access to global communities and in-depth resources to boost your progression!