Forex vs Stocks: Understanding the key differences

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Forex vs Stock: What are the main differences?

Foreign exchange and stocks both give you the opportunity to trade on financial markets,  but they differ in several ways. Before we get to the differences, it's important to note that both, Currencies and Stocks are asset classes containing a variety of financial products that are available for trading.

Forex is speculating on the price of one currency against another. With stocks, which are also known as shares or equities, you are speculating on the price of the stock of a publicly traded company.

You might ask yourself: ‘which should I trade between stocks or FX?’ Understanding the differences between the two asset classes is your first step, taking your trading strategy, preferences towards risk and other key factors into consideration.

Key differences include:

* Source: Statista

Why trade Forex

The thrill of trading forex is like no other, due to the sheer size of this major global and very liquid market that is highly regulated. The foreign exchange market can be accessed in all major financial centres and across all time zones – truly, forex never sleeps. 

The daily turnover of the Forex market is in the trillions of dollars and with all the active trades taking place, there is more than enough opportunity to go around.

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Why trade stocks?

Trading stocks can be just as exciting as forex for a number of reasons, including long term trends, and new technology entering the financial market to name a few. 

For a lot of traders, it can also be more intuitive and easier to understand than an enormous and very complicated market like forex, which can take years just to understand. By being able to grasp what moves one stock’s price up and down faster than the many factors that affect forex, many are able to start speculating on stocks and trading with confidence faster.

By using a derivative product to trade, like CFDs[KS5] , you don’t have to take ownership of the share. Unlike traditional investing which consists of buying stocks and holding for capital gains and dividends, trading CFDs give you more opportunities by providing flexibility to go long or short, depending on your expectations.

 Even though the trading times of stocks are limited, compared to forex, with certain brokers you have the chance to trade after-markets[KS6] .

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Forex vs Stock: What moves the market?

When it comes to understanding movement in the forex or stock market, you’ll need to know the external factors that impact the specific underlying asset’s pricing, so that you’re more aware and faster to respond to drastic price movements. If, for example, you’re attracted to high volatility and love the thrill of huge swings, then you might find the forex market works for your trading style as a swing, momentum or day trader. Or the stock market could satisfy your trading appetite if you’re a technical or position trader who is looking to play the longer game. Where a scalper will most likely not like the less severe fluctuations from the stock market compared to the forex market.

The forex market is driven by a wider range of factors, including geopolitical events, interest rate decisions, changes to inflation, market sentiment and global economic trends, whereas the stock market is influenced more directly by company-specific news, trends for that business’ industry and economic data releases. However, the bigger picture that affects the FX market will also have an influence on individual companies.

While there are similarities between what influences the forex market and the stock market, these similarities are more pronounced in the forex market. Stocks, on the other hand, comprise numerous sectors and industries, encompassing thousands of individual stocks that collectively form the stock market.

Which derivative will suit my trading style?

The great thing about both forex and shares is that the markets cater to various trading styles and risk appetites. There’s no right or wrong answer on which type of trader should be trading forex or stocks, as both have risks and also opportunities to profit.

If you’re unsure about which market to start trading in, you can always use a risk-free demo account to explore and learn both the forex and stock market.

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FAQs:

Which is better: forex or stocks?

Neither trading forex or stocks is better than the other asset, it comes down to your own trading preferences, risk tolerance and trading style. Where a scalper will like the trading conditions in the forex market a position trader will be able to play the longer game in the stock market.

Forex vs Stocks: What are the differences?

Forex is speculating on the prices of foreign currencies while with stocks you’re buying or selling shares in a publicly traded company. With FX you have a decentralised market structure, where the trader will hold one position and the broker, or finance bank the other,  where stocks are traded via an exchange. Trading forex is more liquid with flexible trading hours, while the stock exchange has limited trading hours and has less liquidity.