Personal FinanceForex Trading vs. Stock Trading: Differences & What is Best for You

SpenderrificSeptember 20, 20217310 min

Forex trading vs. stock trading, which of these trading options is best for you? Every day, thousands of people think about trading in the financial markets. After deciding to trade, they must make another decision about what financial instrument to trade. That’s where the debate starts. 

Since the trading skills are transferable, some traders trade both stock and currency. As a beginner, you should understand the differences before making a choice.

What is forex?

Forex (Foreign Exchange) refers to a market where currencies are sold and bought. It is the largest market in the world. 

Here, you can trade currencies against each other as exchange pairs. In addition, the foreign exchange markets allow both spot trading and derivatives trading.

What is stock trading?

Stock trading is the buying and selling of company shares in a regulated market. 

Company shares are units of ownership of a company. Stock trading can either be spot trading or derivatives trading.

When choosing between both stock and forex trading, considering the following factors can be helpful.

Related post: Want To Invest In an Index Fund? Keep This in Mind

Trading time

The hours of the stock exchange are fixed, and this limits stock traders. For example, the New York stock exchange runs from 9:30 AM to 4:00 PM every working day. Therefore, no trades get executed outside those hours, on weekends and public holidays.

As a result of electronic trading, some stock markets now allow for pre-market and post-market trades, but they are of little use since non-market hours relatively have low liquidity.

Forex markets allow you to trade at any time. Because it has no single location, the market opens 24 hours a day on weekdays. Here, there are no limits, and you can trade whenever you want. You do not have to wait for the opening bell of a stock exchange.

Liquidity

Liquidity refers to the ease with which you can sell an asset on the market. The higher the liquidity, the faster you can buy or sell the asset. Therefore, markets with higher trading volumes mean that they are highly liquid, and you will not be stuck with the asset trying to look for a buyer or seller. 

Forex is the most popular and most prominent market, making it highly liquid. Still, the currency pairs you choose and the timing of your trading could affect the liquidy of your forex trades. 

On the other hand, the stock market has fewer trades in general. However, you can still buy or sell your shares quickly. The liquidity of the shares you choose will largely depend on the popularity of the shares, where stocks from blue-chip companies are more liquid than the rest. 

News

Stock traders focus on news about individual companies. The phrase, ‘Buy the rumor, sell the news’ shows how important information about companies can be to stock traders. Positive news or rumors about companies improves share prices, and when there is bad news, they drop.

Traders can profit from price movement by buying low and selling high or by shorting the stocks in the case of undesirable news. For example, assume Company A has had a bad quarter, and this news has caused a drop in share prices. You, a trader who plans to profit from this news, can do so in two ways. One way is to short the stock. Another way is to wait till the price crashes so that you can buy and resell when prices go up.

Forex traders monitor news about entire economies. As a forex trader, you have to pay attention to inflation, unemployment, and GDP. Macroeconomic news influence the performance of currencies.

Since you are buying one currency and selling the other, you have to monitor the economic news of the two countries.

Leveraged trading and margin trading

If you have a higher risk appetite and a small capital, you can make more money trading forex. Forex allows you to trade using borrowed money and your own money as collateral. Leveraged forex trading commonly enables a ratio of 50: 1 to individual traders.

Leveraged trades can serve as a hedge against risk. For example, if you have a position opened in a spot market, you can hedge against that position through leverage.

Margin trading also allows you to diversify even when you have just a little capital. You can open many positions with just a little money.

Few stock brokers offer leveraged trading, and when they do, they typically give low ratios.

Leveraged trading can make you a lot of money when done responsibly. However, it can also give unfavorable results when used recklessly. Therefore, you should ensure you understand the risks involved before you begin to trade with leverage.

What’s Best For You

So, which of these trading options is best for you? 

Well, it all boils down to your personal preferences. Before you choose between stocks and forex trading, consider your risk appetite and the factors mentioned above.

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