The most popular financial markets amongst both experienced and retail investors are arguably, the stock and forex market. Collectively, these markets see trillions of dollars worth of trade each and every day.
There are some similarities between the two markets, but part of your research before opening a position may include analyzing the difference between forex and stock trading.
Through a further understanding of the individual markets, you can decide which of the two top markets is best suited to your trading style and strategies.
Read on to find out more.
How and when you access the financial markets is an important factor to consider, as it can alter your trading strategies or your reaction to market sentiment or price movements.
When it comes to forex trading, the market is one of the largest in the world, and mainly consists of trading currencies on the over-the-counter market. There is no physical exchange, and due to its global capacity, can be accessed 24 hours a day and five days a week.
Experienced traders will make the most of the different time zones of nations across the globe. It’s also worth considering the popular trading hours of the particular currency pair you wish to invest in, as this can affect the pair’s liquidity and cost of the spread. These hours tend to be when the trading hours of the currencies’ countries overlap.
The trading hours of the forex market also contribute to its volatile nature, and the level of risk involved. It can experience significant fluctuations daily, and so is best to implement a thorough risk management strategy when forex trading.
For the stock market, there are set trading hours, which correspond to the relevant stock exchange. The London Stock Exchange, as an example, has the longest trading hours across the different exchanges. It’s open between 8:00 am and 4:30 pm (GMT), and is closed for a short time between 12:00 pm and 12:02 pm. When stock trading, your strategy would have to adapt according to the market access.
Both markets can be accessed through financial derivatives, such as contracts for difference (CFDs). Skilling, an online CFD trading platform, states:
“CFD trading offers traders and investors an opportunity to speculate on the price movement of the assets, without owning the underlying asset itself. In contrast with traditional investments, CFD trading allows traders to take positions on falling prices as well.”
One of the benefits of using a CFD broker is that it enables access to the global markets in a single trading environment, meaning you can trade both stock and forex CFDs.
Volatility and liquidity levels
Another main difference between forex and stock trading is the volume of trade that the markets experience. Although both see a considerable amount of trade, the forex market can see up to US$6 trillion worth of trade in a single day. The stock market, on the other hand, experiences a smaller amount, with US$200 billion worth of trade each day.
The larger volume of trading means the forex market tends to be more liquid than the stock market. The trading hours, as previously mentioned, are also a contributing factor to levels of liquidity. Therefore, traders may find that forex trading can be slightly easier than stock trading, with tighter spreads and sometimes lower fees to pay.
In contrast, the forex market can witness much more volatility compared to the stock market, as the value of a currency pair can dramatically change in a short period of time. Forex trading can be part of a short-term strategy, whereas stocks can be beneficial in the long term. Through technical analysis, traders can follow the pattern of price movement of the stock market, which tends to be more stable over a longer period of time.
Factors that influence markets
The factors that can impact these two markets are also different. When partaking in forex trading, you’ll need to have an understanding of the global economy, as well as any political events that can influence the value of a nation’s currency. Forex trading also involves monitoring the release of any economic data, such as unemployment rates, interest rates, and inflation levels.
The stock market, on the other hand, can be affected by the performance of the companies in question, or ripples amongst the relative industries. Stock traders will be evaluating earnings reports and company revenue, for example, to inform their trading decisions.
Before entering the forex or stock market, you should carry out research to ensure that you are well informed, and choose the market suited to your trading strategy. If you are an experienced trader, and in order to diversify your investment portfolio, you could decide to open a position in both markets.