Stocks vs Forex: A Comparative Guide

In this day in age, investors have many options on where to allocate their money to watch it grow – two of the most popular: Stocks and forex.

Deciding which market to participate in can be difficult, making it essential to understand the difference between the two of them.

Did you know that the forex market consists of over $5 trillion traded each day? That’s more than 25 times the amount of the stock market on average.

That’s just one way they differ, keep reading this guide to learn more about stocks vs forex and what they are all about.

Stocks vs. Forex

If you are not familiar with financial markets, you may assume stocks and forex are the same things. However, this is not the case. The stock market and forex do influence each other and are both significant factors in our economy.

Both markets have traders who have very unique methods of speculating on the markets to make money.

To better understand how they are different, it’s critical to learn how each one functions.

What Is the Stock Market?

The stock market is a “hub” where investors and institutions go to trade stock, or ownership of a company, in exchange for currency. Investors will buy a stake in a company with the hope of generating a return over time.

As companies grow over time, they will generate extra earnings. With the additional profits, companies will either:

  • Pay a dividend
  • Or reinvest into the company

Typically, growing companies will reinvest the extra earnings into other projects to further increase future profits. An established company, such as Coca-cola or Apple, will pay a portion of earnings to shareholders (investors) in the form of a dividend.

What Is the Forex Market?

The forex market or foreign exchange is where individuals go to transfer currencies. A currency is defined as a form of payment, such as the U.S dollar or the Euro.

For example, you reside in the United States but would like to buy a bottle of wine from Italy. This transaction will consist of exchanging U.S dollars for the Euro. Each currency has its own value and will determine how much of one currency you get in exchange for another.

Comparing Forex vs. Stocks

If you are trying to figure out whether to invest in the stock market or forex market, learning the differences can help you make a better decision.

Although both forex and stocks involve the transfer of money, the respective markets are very different.

Leverage

One of the most significant differences when it comes to the stock and forex markets is the leverage requirements. To leverage means to invest with borrowed funds, typically from your broker.

In the stock market, you will have to apply to use leverage. If you get accepted by your broker, typically, they will allow leverage up to 2:1 depending on the broker.

The forex market, on the other hand, it is very easy to leverage your position. You don’t have to qualify, and if you live in the United States, you can leverage up to 50:1.

Regulation

Investing, as well as trading in the stock market, is heavily regulated. The Securities and Exchange Commission oversees it.

The forex market is much less regulated – hence the amount of money traded on the market each day.

Ease of Liquidity

Liquidity, when it comes to finance, is how accessible it is to buy or sell an asset at a steady price.

In the stock market, liquidity will depend on the equity you are buying or selling. For example, Apple’s stock is highly liquid, as many investors are buying and selling. However, lesser-known assets may be less liquid and harder to buy or sell.

With the forex market, it is slightly different. Since there are extensive amounts of each world currency, liquidity is not an issue.

Market Hours

If you are looking to invest or trade in the stock market, you are going to be limited to market hours, which are between 9:30 AM and 4:00 PM eastern time.

The forex market is considered an over the counter market, and trades 24 hours a day, five days a week. The forex market is open from 5 PM Sunday to 4 PM Friday eastern time.

Trading Forex vs. Stocks

Traders from all over the world regularly participate in buying and selling in both forex and stock markets. Although both markets involve buying and selling, the similarities stop there.

Trading in either market comes with its risks, and it is recommended to do your due diligence before jumping into trading.

The New York Stock Exchange (NYSE) is home to almost 2,000 stocks alone. You have many options to choose from in all different industries, with all different valuations and relative prices.

Although there are over 180 currencies worldwide, traders on the forex market tend to stick to five currencies, including:

  • U.S Dollar
  • Euro
  • Japanese Yen
  • British Pound
  • Swiss Franc

Currencies are traded in pairs on the forex market. These five currencies make up what is known as the “major pairs,” or the pairs that are traded most often. The major pairs consist of:

  • EUR/USD
  • USD/JPY
  • GBP/USD
  • USD/CHF

When trading a currency pair, the first currency listed is known as the base currency, while the second currency listed is the quote currency.

One significant difference in stock trading vs. forex trading, with foreign exchange you are trading one currency for another. In the stock market, you are either buying or selling specific equity.

Either route you decide to go, just know there are many tools available to you that will assist with your goals.

With the forex market, using tools like automated forex software can help simplify your strategy and set you up for incredible returns.

Trading the stock market, you will have access to similar resources. Check with your broker to see what kind of software they offer and go from there.

Want More Information About Financial Markets?

Investing in financial markets can seem like an impossible task sometimes. Deciding whether to put your money in stocks vs. forex, or even other types of financial markets.

No matter what you choose, make sure you are doing your due diligence and doing your research into the investment.

For more information about financial markets and other personal finance topics, check out the rest of our website!

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