Stocks and forex are the two most popular financial markets globally. However, before deciding which market to choose, it’s best to know which suits your financial goals, risk appetite, and trading strategy.
Foreign exchange or forex is a market where currencies are bought and sold. On the other hand, the stock market involves buying and selling shares. So the decision you’ll make primarily depends on your interest, but you also have to consider the five factors below.
1. Trading Hours
A good trading market should allow you to transact whenever you feel like it, whether during the day or at night. Because forex is a global market, you can buy or sell currencies 24 hours a day, though it only operates five days a week. This is advantageous because it provides you with enough time to trade.
The only problem is that the long trading hours create a risk because the market may move while you aren’t monitoring it. That’s why, when you decide to trade forex, it’s imperative that your risk management strategy includes proper limits and stops to protect your trading account.
On the other hand, share trading time is controlled by the opening hours of the stock market where your stocks are traded, which is a disadvantage. That’s why stock markets strive to extend trading hours to make things easier for stock traders.
2. Market Influences
Market influences are those factors that influence price movements. For example, trading in stocks and forex requires buying these assets when prices are low and selling them when prices are high. Basically, demand and supply influence both markets, though other factors also come into play.
When trading in shares, you’ll only have to focus on a few factors, especially those that affect the company whose shares you own. These factors include industry health, news reports, economic data, earnings and cash flows, and debt level.
With forex, you’ll have to consider a wider range of factors, which are also more complex than the factors to consider when trading stocks. These factors include but are not limited to political events, news, gross domestic product (GDP) of various countries, inflation rates, unemployment rates, among others. But once you become an expert at analyzing these factors, trading in forex is much easier.
3. Liquidity
Liquidity refers to the ease with which you can buy or sell a financial asset, in this case, shares or currencies. Liquidity is an essential factor because the flow of money in the market depends on the volume of trades.
A more liquid market will attract more traders. The forex market is more fluid than the stock market because it is the largest financial market. This means that whenever you want to sell or buy a currency, you’ll easily find a ready buyer or seller.
The stock market isn’t as liquid as the forex market because it has fewer traders compared to the forex market. However, some stocks are very fluid. For example, the stocks of big companies like Facebook, Microsoft, or Apple have ready sellers and buyers. All other shares outside the blue-chip shares are relatively less fluid.
4. Leverage
Leverage can allow you to access markets with a fraction of the required capital. It will allow you to place a higher value position than what you currently have in your trading account. For example, if your trading account has $50 in a trading platform offering a leverage of 1;100, you can place a position worth $5,000.
Leverage, therefore, magnifies your returns (profits), but it may also amplify your losses. Both the stock and forex markets offer leverage, but this feature is more pronounced in the forex market.
Whichever asset you choose, make sure you control the magnitude of your exposure and understand the risk you are entering. You can visit FX-list for a list of brokers and the leverage they offer.
5. Volatility
Volatility refers to the likelihood of the price of a financial asset to make unforeseen and major fluctuations. A highly volatile market has frequent price changes, while a less volatile market has gradual price changes.
The forex market is more volatile than the stock market, though the price changes are usually minimal in the short term. Therefore, it is crucial to keep abreast of social, economic, and political events when trading forex. This market is prone to drastic and sudden movements in response to these events.
In the stock market, prices tend to be relatively stable, and changes gradually occur. However, in very rare cases, share prices change drastically in the short term.
Final Words
Now that you know the difference between stock trading and forex trading, you can make an informed decision on which asset to trade. However, many traders prefer forex trading to stock trading, which explains why the forex market is very active. Once you’ve chosen your preferred asset, the starting point is to choose a reliable, experienced, and honest broker.
