The trading market can be confusing for new investors. People often confuse stock trading with forex trading. While they both deal with buying and selling units to make profits, there are some fundamental differences that you must know if you are to succeed in either of them. Once you understand these differences, you can decide which one is better. Investing with such knowledge is better than going in blind. You also need to know about the best forex broker in the USA and those that deal with company stocks. With that, let’s see the difference and similarities between these two markets.
What is Forex Trading?
Forex trading involves buying and selling of foreign currencies. As a trader, you place trades against currency pairs and make profits or losses on the margins. This trading is in real-time. It is never controlled from a central place but occurs between traders over-the-counter (OTC). The market runs through a global network of banks in the major time zones, including Sydney, London, New York, and Tokyo. The forex market is the most liquid and the most active globally. It has a daily trading volume of more than $5 million.
What is Stock Market?
The stock market is different. It involves buying and owning equity of a particular company. When you buy this equity, you essentially become a shareholder. While you can sell this equity at a profit if the company grows in value, most earnings in the stock market are from dividends. These are paid annually depending on a company’s performance that particular year. Companies’ stocks are listed on exchanges of their respective countries. You can buy shares from multiple companies and build up a portfolio over the years. In essence, stock trading is long-term investing.
Which one is better between these two forms of trading?
Forex Trading and Stock Trading are Both Risky
Both forex and stock trading carry a degree of risk. Forex trading involves buying and selling of foreign currencies. This market runs 24 hours a day, five days a week. It is highly volatile as the market keeps shifting in real-time as traders carry out their business. You would have to constantly monitor your trade or set limits to prevent unnecessary losses due to sudden shocks in the market. You can make massive profits due to this volatility and because this market runs for 24 hours a day, but you can also earn huge losses if your trades go against you.
On the other hand, stock trading involves buying shares or equity from a company. This type of trading is more of a long-term business. You build your portfolio of stocks over time and earn as the companies you invest in grow in value. Most earnings are from dividends paid at the end of every financial year. Stock trading carries less risk than forex trading but is also less profitable. There are some financial years that some of the companies you have invested in will fail to return a profit. There is also the risk of liquidation where a company’s business fails and closes down.
Liquidity is how easily you can buy or sell an asset. This aspect is an important consideration when deciding where to trade. The higher the number of buyers and sellers in the market, the more money flows in that particular market. Forex Trading is more liquid than the stock market. You can buy and sell foreign currency instantly and make profits and small margins. The stock market, on the other hand, is not as liquid. It takes more time to buy some companies’ shares and more time to find buyers when you need to sell your shares. However, technology has significantly revolutionized this trading, making it easy to buy and sell stocks online. Considering that the forex market is more liquid, you are more likely to make more money in this market and more losses than the stock market.
Trading Pairs and Time
While there are a lot of currencies in the world, only a few major ones are listed on forex markets. There are seven major trading pairs on the forex markets. It is a bit easier to analyze the seven major currency pairs than to analyze hundreds of companies listed on different stock markets globally. Another aspect to consider is time. The forex market runs 24 hours a day and five days a week. Most stock markets are limited in their respective jurisdictions. You can only trade when they are open.
Which one is better?
It is hard to determine which of the two is better. You can make money in forex and stock markets, but you can also make losses. The forex market is more volatile than the stock market. It would be best to diversify investments to spread your risks in both markets.