As knowledge about finance has become easier to access, more and more people are turning to the financial markets as a way to invest and grow their wealth. However, “financial markets” is a very loose term that covers an enormous and varied number of markets. We will assume that you are relatively new to trading/investing, and so we will look at two of the most popular markets to trade in: the stock market and the forex market. To make an informed decision about which one of these to choose, you will need to do extensive research, and this article provides some insight and an excellent foundation of knowledge for you to make your decision. We will explore the differences between the two markets and help you decide which one is right for you.
Stock Market vs Forex Market: What are they?
The stock market is probably the more popular of the two choices, no doubt you will have seen the Wolf of Wall Street (or even Wall Street if you’re a bit older) and thought that the stock market is very exciting. Although it’s not quite like you see in the movies, the stock market can be exciting if you’re an enthusiast about these types of things, and you probably should be if you’re looking to become a trader/investor! The stock market is a centralized marketplace where publicly traded companies’ shares are bought and sold. It’s a market where investors can buy and sell shares in companies that are listed on stock exchanges, such as the New York Stock Exchange and the London Stock Exchange. When you invest in the stock market, you are essentially buying a small piece of ownership in a publicly listed company such as Apple or Tesla.
On the other hand, you have the forex market, which is not as widely known as the stock market, but no doubt you will have still heard of it. The forex market is a decentralized marketplace where global currencies are traded. The forex market is the largest financial market in the world, with an average daily trading volume of over $5 trillion and a large number of currency pairs. Unlike the stock market, there is no central exchange or physical location for the forex market. Instead, trading takes place over the counter, meaning that transactions are conducted entirely electronically.
Liquidity
One of the main differences between the stock market and the forex market is liquidity. Liquidity refers to the ease with which an asset can be bought or sold without affecting its price. To put this into a personal context, the cash you own is highly liquid as nothing is more liquid than cash, by definition, your car is slightly less liquid, and your house is drastically less liquid. In general, the forex market is much more liquid than the stock market, which makes sense, considering it is a currency exchange. The liquidity of the forex market can also be attributed to its much greater size and activity (frequency of trades). The high liquidity of the forex market means that traders can enter and exit trades quickly and easily without having to worry about finding a buyer or seller.
In contrast, the stock market can be a little less liquid, especially for smaller companies or stocks with low trading volumes. This means that it can be more difficult to enter or exit trades without affecting the price of the stock, but stocks and shares are still broadly considered more liquid assets, so this is just a question of preference. You are unlikely to run into liquidity problems with a sensible trading/investing strategy in either market.
Volatility
Another difference between the stock market and the forex market is volatility. Volatility refers to the degree of price fluctuations of an asset over time. Generally, the forex market is more volatile than the stock market. This is partly due to how easy and, therefore, how often that traders make trades in the forex market. To a lesser extent, this volatility is because the forex market is affected by a wide range of factors, such as political events, economic data releases, and central bank decisions. These factors can cause significant price movements in the forex market, making it a more volatile market to trade.
In contrast, the stock market tends to be less volatile, at least for established companies with a long track record, the type of companies you are likely to be trading in. In comparison to the forex market, factors that affect price volatility are much more confined to the specific company and industry rather than the economy as a whole. While there can be significant price fluctuations in individual stocks, the overall stock market tends to be more stable over time.
Volatility is not necessarily a bad thing, if you are looking to become a day/swing trader, the volatility of the forex market is likely a positive rather than a negative as it represents more opportunity to make a profit. Volatility is probably less desirable if you are looking to hold longer-term positions, so the stock market may be for you.
Trading Hours
Another difference between the stock market and the forex market is trading hours. The stock market has set trading hours at each exchange. The forex market, on the other hand, is a 24-hour market, open from Monday to Friday. This means that forex traders can trade all day, every day if they wished to, taking advantage of market opportunities as they arise. If you are lucky enough to live in the same time zone as a major stock exchange, both the forex and stock market are going to be viable options for you. However, if you live outside the time zone of any major stock exchange, it may be difficult for you to comfortably and consistently trade in the stock market.
Leverage
One of the key advantages of the forex market over the stock market is leverage. Leverage allows traders to control a larger position with a smaller amount of capital. In the forex market, when trading Contracts for Difference (CFDs), leverage can be as high as 200:1, meaning that traders can control £200 worth of currency with just £1 of capital. In contrast, leverage in the stock market with Stock CFDs is often much lower, typically around 2:1 or 3:1, meaning that you can only control £2 or £3 worth of stock with just £1 of capital. This means that traders often need to have a much larger amount of capital to control a significant position in the stock market. This just means that the risks can be higher of losing your entire capital base in the forex market. Remember that if something seems too good to be true, there is always a drawback. Yes, it is easier to start trading on the forex market, but this comes with a higher risk of losing your money.
Which market is right for you?
The answer depends on your individual trading goals, preferences, and risk tolerance. You need to decide what your trading/investing strategy is going to be. For example, you may want to be a day/swing trader, in which case your preference may lean towards the forex market. Alternatively, you may want to hold a longer-term position, in which case stocks and shares might be more preferable.
If you’re looking for a market with high liquidity and the potential for significant profits, the forex market is for you. The high leverage available in the forex market allows traders to make large profits with a relatively small amount of capital. However, this also means that the forex market is a high-risk market, and traders need to be prepared to manage their risk carefully.
On the other hand, if you’re looking for a more stable market with lower volatility, the stock market will be a better fit. While the stock market does have its own risks, such as company-specific risk and market-wide risk, the overall market tends to be less volatile than the forex market. Additionally, the stock market can be a good option for investors who are looking for long-term growth as opposed to short-term trading profits.
There are also other factors to consider outside of the individual market characteristics. For example, the age-old saying “trade what you know” exists for a reason. If you have a background in a certain industry, you are much better off trading stocks and shares in that industry, as you already have a base level of knowledge to work from. If you have a background in politics or economics, you may be better off trading in the forex market as you may have a better understanding of the global financial market. The point is this, you will need to do a significant amount of research anyway, so why not choose the market that lowers that workload?
Forex market vs Stock market takeaways
In conclusion, both the stock market and the forex market offer unique opportunities for investors and traders. Understanding the differences between the two markets can help you decide which one is right for you. It’s important to carefully consider your goals, preferences, and risk tolerance before choosing a market to trade in. Additionally, it’s always a good idea to educate yourself and seek out guidance from any source that may offer it before risking your hard-earned money in any financial market.
