When thinking of trading, many people think of either stocks or forex. While both these markets can make for good trading opportunities, they often require different things from the trader and result in very different experiences. To help you better understand these differences, we’ll define what each term means and then break down their individualistic qualities.
What is stock trading?
Stock Trading is the buying and selling of shares (or fractions) of publicly traded companies. The “share” represents a given amount of the company’s assets and earnings/profits, which entitles its owner to some benefits such as receiving dividends or voting rights during elections for the board members. The price per share constantly changes as traders enter and exit their positions.
What is Forex trading?
Forex (or FX) stands for Foreign Exchange, which can be defined as the simultaneous buying of one currency and selling another. The foreign exchange market (where you’ll make your forex trades) is the largest financial market in the world; it carries a daily volume of over 3 trillion dollars and has no centralized exchange or central bank controlling its activity.
The Forex market enables international trade and investments by allowing businesses to convert one currency to another without worrying about conversion rates. This makes it highly attractive for traders due to the high liquidity, meaning that there are always buyers and sellers at any time during a business day.
How are they different from each other?
In the grand scheme of things, stock trading is more complex than forex. While you can quickly get started by opening a Forex account with an online broker and making small investments, becoming a successful trader in stocks will require a little more work and education on your part.
Because forex does not have any limitations on leverage, it’s easier to trade significant amounts while risking small sums of money. As for stock trading, there are many different variables such as:
- Dividend policies
- Capital gains taxes
- The amount of available information makes it harder to predict how stocks will perform than currencies that tend to follow similar trends (i.e. interest rates or central bank announcements).
What are the key differences between stock and forex trading?
- Stocks require investors to put actual capital at risk, while forex does not.
- Stocks have more stringent requirements for starting, location of a broker, etc., while every forex broker accepts currencies from around the world, but fewer brokers have direct market access.
- There are far fewer minimum investment amounts for stocks than for forex trading.
- Stocks can have small entry-amount requirements but some trade as high as $12.50 per share, while forex traders can make high volume trades for just a few dollars.
- Stocks usually trade infractions, four options being 1/4$, 1/2$, 3/4$ or whole shares, but some stocks have minimums as low as $5. Forex trading is all about quantity, so the entry amount is always tiny and does not matter since the fraction of a cent moves the price just marginally more than no trade at all.
- Federal agencies like SEC regulate Stocks; forex brokers may fall under international bodies like NFA (Futures Association)
Risks associated with forex and stock trading
There are many risks in trading in the stock and forex markets. People should always do their research before they start trading because there is a chance that they can lose all of their money. When trading stocks or forex, some things to keep in mind are that some currencies have higher returns while others have lower ones. In contrast, some may even have negative returns, which means you could theoretically lose all of your initial investment.
The Bottom Line
Despite their differences, stock trading and forex are great ways to make money. While forex is easier to get into, the lack of limitations on leverage also makes it riskier than stocks which require you to put up more capital before making any profits. Investing in either market will present its challenges. Still, over time, you will succeed with your investments by staying aware of international economics and using a reputable online saxo broker.