Trading in stocks and currencies is one of the ways many people around the world use to grow their money. There are those people who have made money by being long-term traders while others are known for being day traders. In this article, we will look at stock trading and forex trading and see which you should trade on.
What is Forex Trading?
Forex is the short form of the terms foreign exchange. Forex trading is therefore the process of buying and selling currencies with the goal of making a profit.
Currencies are always on the move. These movements are caused by various factors such as a weak or strong economic data. For example, the dollar can gain when the Federal Reserve hikes interest rates. It can also fall if the country releases weak economic data.
A good example of a forex transaction is when you exchange your dollars to euros. If you have $1000 and the exchange rate is 1.1200, it means that you will have 1,120 euros. If the exchange rate drops to 1.1150, you will have about $1004. When done in a large scale, forex trading can be very big. Forex trading is usually worth more than $5.3 trillion every day.
Examples of Currencies Traded in Forex
Examples of Leading Forex Brokers
- XTB Crypto
What is Stocks Trading?
Stocks are also known as shares. A stock is simply a small holding of a company. For example, when you buy ten shares of a company, it means that you own a small percentage of the company. As a small owner, you are eligible to receive dividends. You can also participate in the company’s annual general meeting. According to the World Bank, stocks worth more than $3 trillion are traded every day. In 2015, all stocks invested around the world were worth more than $95 trillion.
- General Motors
- General Electric
Examples of Popular Stock Brokers
Forex vs Stocks
The first difference between stocks and forex is the time the two are usually open. The forex market does not operate in an exchange. Instead, it operates in market centres. This enables the market to be open for 24 hours, 5 days a week. The market opens on Monday morning in Asian market centers. This time is usually at night in Europe and in the United States. It closes on Friday evening after the US markets close. This means that traders can participate in the market at any time during the week.
Stocks are different from forex because they are usually housed in an exchange. The biggest exchanges in the United States are Nasdaq and the New York Stock Exchange (NYSE). These exchanges usually open for a few hours every day. Therefore, you can only trade in stocks only when the exchanges are open.
Therefore, on the time open, forex wins.
The forex market is global in nature. This means that there are many companies that offer brokerage services. For this reason, people from around the world participate in the forex market. This is different from what happens in the stock market. Most brokers can only accept local retail investors. For example, it is not possible for a Kenyan to invest in American stocks using a broker like Robinhood or Charles Schwab. This is simply because these companies are barred by law to allow international traders.
The forex market is different. Different because most brokers allow traders from around the world. This is the reason why many people in the emerging and developing countries are participating in forex trading.
Therefore, forex wins on the fact that anyone can participate.
Price of Stocks vs Currencies
There is also a difference between the two based on the price. The exchange rate of many currencies is usually very small. For example, as of this writing, the exchange rate between the US dollar and euro is about 1.0888. This means that you don’t need a lot of money to trade the EUR/USD pair.
Stocks, on the other hand, are relatively different. Some stocks are so expensive such that they are unaffordable to many people. For example, the stock price of a company like Berkshire Hathaway is more than $200k. Amazon’s stock is trading above $2,000. Therefore, very few people can afford these stocks.
Forex wins again when you consider the prices.
The only return that forex traders can have is based on price movements. For example, if the EUR/USD pair moves from 1.1100 to 1.1120, it means that you have made 10 pips from this. On the other hand, stocks have other types of returns. For example, you can make money when the stock price rises and when the company pays dividends.
Stocks win when you consider the returns.
The forex market is usually very liquid. As mentioned before, traders make trades worth more than $5 trillion every day. This means that you will always find someone to buy your currencies to. Stocks too are liquid. However, this can change when a company’s stock is dropping. It is possible to not find someone to sell the stock to.
Similarities Between Stocks and Forex
There are several similarities that exist between stocks and forex trading. These are:
- Both long and short. This means that you can benefit when the price of stocks and forex move up and down.
- Automate trades. It is possible to automate both stocks and forex trading.
- Leverage. Most forex and stock brokers provide traders with leverage. This leverage enables them to open bigger stakes.
- Correlation. There is a relationship between stocks and currencies. For example, US stocks tend to fall when the dollar gains.
- Fundamentals. Currencies and stocks tend to be moved by similar fundamentals. For example, stocks and the dollar tends to rise when economic data is positive.
A good thing about trading is on the many assets that are usually available. As a trader, focusing on forex has more advantages than trading in stocks. However, there are those people who prefer stocks because they are less volatile. Even when trading, we recommend that you have some money invested in stocks and index funds. This is because in the long term, returns in stocks have outperformed most of other assets.
Crispus is a finance professional with more than a decade experience in the industry. Over the years, Crispus has written in-depth articles on leading platforms like CCN, Marketwatch, and Seeking Alpha. He also runs a Forex education and managed account company called WestEndFx.