Essential Trading Differences Stocks vs. Forex You Need to Know

Essential Trading Differences Stocks vs. Forex You Need to Know
Source: Markettraders.com

If you’re interested in trading currencies and stocks, it’s important to understand the key differences between them. Of course, there are some glaringly obvious ones, like the fact that forex (foreign exchange) always trades in pairs. Stocks, on the other hand, are traded individually and not directly related to any nation’s money system. But what about subtle and even more important differences? For example, as a forex trader are you aware that you pay next to nothing in commissions and fees compared to your stock-trading counterparts? Plus, when you take part in foreign exchange markets you get the advantage of 24-hour action. That’s not true with traditional equity exchanges which tend to have strict hours during the work week. If you are just beginning to master the principles of forex trading for beginners, here are some of the other essential differences between forex and stocks that you should know.

Methods

When you buy or sell currency, your chance for profit or loss is dependent on an entirely different set of conditions than when you buy or sell a company’s stock. Equity prices tend to rise and fall on the confidence that people have in that specific company. When you engage in a forex deal, your return on investment is related to large international events: wars, floods, elections, treaties, and dozens of other factors. If you want to enhance your currency trading abilities, you need to stay on top of multiple economic and political news.

Platforms

Depending on your point of view, the fact that forex only trades via online platforms can be a pro or a con. People in the equity markets have many ways of purchasing and selling shares. They can do so through a broker, a bank, an online third party, their employers, or sometimes even from the issuing corporation itself. There’s no such variety with currency trading which operate solely via online brokers.

Type of Analysis

Traders have long emphasized two very different kinds of analysis: technical and fundamental. When you trade currency, you tend to focus more on the technical because you’re looking for short-term profits rather than long-term investments. Conversely, many traditional stock market enthusiasts employ a combination of technical and fundamental analysis based on whether they’re looking for long-term or short-term profits. Also, as noted above, when your money is invested in a corporate stock, your focus is centered on the health or weakness of that particular company rather than on international economic factors, as is the case with forex.

Time

Both forms of trading can be demanding of your time, but people who deal with foreign exchange tend to be more consistently involved with their endeavor. Perhaps that’s due to the fact markets are open around the clock and transactions tend to last for just a few hours. People who buy and sell equities, however, often do just a few deals per year unless they are looking to turn their trading into a part-time or full-time job as day traders. The amount of time you spend per year as a stock trader could be as little as a few hours in total.

Liquidity

It’s possible to purchase huge numbers of shares of a large company’s stock, but the same can’t be said for medium-sized and smaller firms. That’s because firms set limits on the total dollar amount of equity they wish to issue. When large, institutional buyers seek to acquire a large percentage of a corporation’s outstanding equity, it just might not be available for sale. Forex participants never have such challenges because the amounts of currency available to buying and selling is virtually unlimited. Plus, you never have to wait to find someone to sell to or buy from. The international currency markets are completely liquid compared to the world’s major stock markets.

Leverage

Even trading enthusiasts who have good credit, large amounts of cash, and are approved for margin trading don’t get more than about 2-to-1 leverage. In other words, they can use $1,000 to purchase $2,000 worth of stock. Forex traders are much more fortunate in this regard. First, they don’t need to apply for a margin account, so there’s no worry about approval. Second, they can start right off using leverage amounts of anywhere from 50-to-1 up to 200-to-1, depending on the rules of their home country.

Price Sensitivity

When you are active in the equities markets, it’s possible to affect the current price by either purchasing or selling a large number of shares. Institutions do this all the time when they acquire or dispose of large blocks of stock in their pension funds. On the forex side of things, no company or individual can make a transaction so large as to affect the values of the paired currencies. The dollar amounts are just too vast to be susceptible to a single transaction.

The Regulatory Environment

If you’ve traded stocks before, you already know how many rules and regulations there are, even for small-time traders. Even opening a brokerage account can be a major hassle and entail dozens of forms, releases, and other kinds of red tape. Forex has a huge advantage here because in most countries it’s relatively simple to open an account and begin trading the very same day. As long as you place your orders correctly and have funds with which to operate, you’re good to go.

Volatility

In a stable world economy, the forex markets tend to remain relatively calm. But, in that same environment, the various stock exchanges can be rising and falling by large percentages. That’s because individual corporations often issue news reports about their earnings, a new product, or a pending lawsuit that can affect share prices dramatically. The same news has virtually zero effect on the relative prices of international currencies. However, global economic crises, wars, and major political news can affect both the equities and forex markets in the same way. That’s why both types of traders keep a close eye on national and international news and finance headlines. Overall, however, stock prices tend to be much more volatile than international currencies.