Financial trading is filled with a range of instruments, with many important considerations to make when comparing forex trading vs stocks trading, and other forms of CFD trading.
When it comes to trading, forex and stocks are two of the most popular markets that get discussed but there are some key differences between the two. In this article, we take a look at a few of the key things to keep in mind when deciding whether to start trading forex vs stocks, along with some of the similarities.
Introduction To Forex Trading Vs Stocks Trading
The foreign exchange market, or forex, is the market in which currencies are traded against others. Currencies are important to most people around the world because they need them to buy goods and services and the value of your home currency on a day to day basis can impact the prices you pay for these goods and services longer term.
When you trade forex, you’re effectively borrowing one currency to buy another. This means that you can trade with leverage, which can lead to both higher profits and higher losses.
Currency trading is also conducted in pairs, so you’ll always be buying one currency and selling another. This can make forex trading a bit more complex than stock trading.
When you trade stocks, you’re essentially buying and selling ownership in a company. The price of a stock is determined by supply and demand, which is influenced by a variety of factors, including the company’s financial stability, the overall market conditions, and investor sentiment.
There are two primary ways to trade stocks: buying and holding for the long term, or trading for the short term. We have a section designed for those interested in learning how to trade stocks.
Long-term investors generally buy stocks and hold them for years, if not decades, in hopes of riding out the ups and downs of the market and eventually making a profit, collecting dividends along the way.
Short-term stock traders, on the other hand, generally buy and sell stocks much more frequently, looking to take advantage of small price movements in the market. This is usually done with leveraged equities, or CFD contracts.
Differences when Trading Forex VS Stocks
Here’s a look at are a few key differences between trading forex vs stocks below:
- Leverage: When trading forex, you can use leverage to make your trades. This means that you can trade with more money than you have in your account. This can help you to make more money, but it can also increase your losses. The same can be said of trading stocks CFDs, options, or futures, but for pure unleveraged stock trading this is not the case.
- Margin: When trading forex, you will need to post margin. This is a small percentage of the total value of your trade that is held in your account as collateral. Again this is similar in stocks CFD trading, but not in unleveraged stocks.
- Volatility: Forex markets are typically more volatile than stock markets. This means that prices can move more quickly, and you may see larger price swings. This volatility is amplified in part due to the aforementioned leverage usage in forex trading.
- Trade size: You can trade very small amounts of money in the forex market. This is called micro trading. You can also trade larger amounts, called standard or mini lots. Whilst you can now open fractional stock positions, the average position size is still larger with stocks than is the case with forex trading.
- Trading hours: The forex market is open 24 hours a day, 5 days a week. There are particular periods of time where certain currencies are more actively traded than others (see here for an example of the main forex trading sessions), but the market does not close during the working week. This gives you more flexibility in when you can trade. With some stock brokers you can exercise out of hours stock trades, but usually this is a short window of time pre-market or post-market when liquidity and pricing is usually impaired.
- Ownership type: Stocks represent ownership in a company, while currencies do not. This means that when you buy a stock, you’re buying a piece of a company and are entitled to any dividends that the company may pay. With currencies, you’re simply trading one currency for another and don’t have any ownership stake in either currency.
When it comes to forex trading vs stocks trading, those highlighted above are a few key differences to consider. You may also want to reflect on the potential tax differences. To summarise briefly, these include :
- Use of leverage
- Margin requirements
- Market volatility
- Trade size
- Trading hours
- Ownership type
Fundamental and Technical Analysis Used in Forex Trading Vs Stocks Trading – Similar But Different
There are two main types of analysis used when trading which differ slightly when forex trading vs stocks trading. These are technical analysis and fundamental analysis.
Technical analysis is the study of past price action to identify patterns that can be used to predict future price movements.
Fundamental analysis is the study of economic indicators to determine the underlying health of an economy and its currency; or a company and its stock value.
Both technical and fundamental analysis have their strengths and weaknesses, but many traders believe that a combination of both is the best way to trade forex and stocks.
Technical analysis can be used to identify trading opportunities by looking for patterns in price action. Fundamental analysis can be used to determine which currencies or stocks are undervalued or overvalued and to make trading decisions based on economic data.
Trading forex vs stocks can involve more moving parts
In general, it can be more complex trading forex vs stocks due to the many moving parts, and the fact you are trading pairs of currencies as opposed to a single stock. The forex market is also much larger and more liquid than the stock market, meaning that there are more opportunities, but also more risks.
It could be said that forex trading requires a greater understanding of the underlying economic factors that can move currency prices, as usually these move more in line with macro factors than individual stocks might.
Stock indices can be more generally in line with macro factors than one individual stock, which depending on the sector it is in, may actually trade almost agnostic to the wider economic trends.
Forex Trading Vs Stocks Trading Analysis In Summary
Overall, both forex and stock traders would benefit from having a solid understanding of fundamental and technical analysis, as there is no harm at all in improving the ways you can confirm or deny what may seem like a trading opportunity.
Whilst forex trading vs stocks trading may seem at first like they are quite different activities, there are more similarities than first meets the eye. If you are day trading either with leverage, or as CFDs, then these differences reduce even further.
If you have experienced success in forex trading, you can certainly apply some of what you already know to the stock market and be ahead of the average trader… and vice versa for successful stock traders!
If you would like to see some of the best brokers or trading platforms for trading forex or stocks where you are, take a look through our list of broker reviews.