Traders usually compare forex vs stocks before deciding which is better. On the New York Stock exchange, there are over 2,800 stocks, and on the NASDAQ over 3,300. In forex, there are tons of currencies to pick from, although the most popular ones are EUR/USD, USD/JPY, GBP/USD, and AUD/USD. So, the big question is this: which is better, stocks or forex?
Here’s what you should know!
5 Facts About the Differences Between Stocks vs Forex
Although these two markets are interlinked, stocks and forex are still very different from one another. If you have a specific trading style, it will probably be easier for you to pick the market you want. However, it’s always good to know their differences, as this will help you to make fully-informed decisions. Forex and stock’s main differences come down to volume, liquidity, market hours, commission, and narrow/wide focus.
- Volume. Forex has a much bigger volume when compared to the stock market, with over $5 trillion being traded every day. In contrast, the stock market has an average of $200 billion per day in trades. A large trading volume can be seen as an advantage, as it is more likely to give traders the flexibility to open/close positions closer to the prices they want.
- Liquidity. More liquidity makes it easier for traders to enter/exit the market. The higher the volume, usually means higher the liquidity, and as a result, provides tighter spreads with lower transaction costs. Popular forex duos usually have very low spreads and transaction costs, and this is actually one of the top advantages of forex against stocks.
- Market Hours. Forex is open 24 hours a day, 5 days a week, and brokers are usually open from Sunday at 5:00 pm EST, until Friday at 5:00 pm EST. Stocks, on the other hand, are a bit more limited. For instance, most of the U.S. stock exchanges open at 9:30 am eastern time on weekdays (except stock market holidays) and close at 4:00 pm EST. On early-closure days, typically right before or right after a market holiday, regular stock trading ends at 1 p.m. ET. Therefore, forex can be seen as more flexible when compared to stocks, since you have access to trade during U.S., Asian, and European market hours; customizing your own trading schedule.
- Commissions. Most forex brokers don’t ask for commissions anymore, but profit from the spread’s margin (aka buy/sell price). With stocks, traders are often asked to pay both commission and the spread, but this varies between brokers. Usually, however, forex spreads are much more transparent compared to other markets.
- Narrow/Wide Focus. One of the biggest differences between forex and stocks is the trader’s focus. Forex traders mainly concentrate on these 8 currencies:
- U.S Dollar (USD)
- Japanese Yen (JPY)
- European Euro (EUR)
- British Pound (GBP)
- Canadian Dollar (CAD)
- Swiss Franc (CHF)
- South African Rand (ZAR)
- Australian/New Zealand Dollar (AUD/NZD)
This gives them a wider focus since they need to keep into account factors like unemployment, inflation, and GDP (Gross Domestic Product) that constantly change.
Stock market traders have thousands of options to choose from, but the basic things to look out for are a company’s cash flows, earnings guidance, and debt levels.
Trading Style and Risk
At the end of the day, it all comes down to what kind of trader you want to be, and how much you are willing to risk. (Risk is inevitable when trading by the way!)
Short-time traders usually open/close positions in small periods of time (minutes), and carefully look at price movements and then buy/sell accordingly.
The advantage of this is that they depend more on volatility, rather than fundamental variables that affect the market. The disadvantage is that beginners might end up losing more money than they invest until they establish a certain strategy.
Medium-time traders are the type where they hold onto positions for a longer period of time (more than a day), usually expecting bigger moves in the market.
The long-term type can hold onto their trades for months or even years, but this ultimately will mean larger fund requirements to “protect” them during volatile times.
The best market is…
Well, unfortunately, there’s no right or wrong answer. (Sorry!)
It all comes down to the type of trader you want to be, the style you choose to trade in, how much time and money you’re willing to invest, etc.
Before making any decisions on which market to proceed with, it’d be good to evaluate your trading style and financial goals.
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Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.
Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.