If you’re looking to make a little more money, investing is the way to go. While some people choose to invest in something like property, others opt for a more involved approach: trading.
There are lots of different ways you can trade, but the vast majority of people choose either their local stock exchange or the foreign exchange market (forex). While there are some similarities between the two, there are far more differences between the stock market and forex than you might think.
What is Stock Trading?
When you purchase something through the stock exchange, you are actually buying a very small piece of a company. If the company does well, the value of your share will increase and you will make money. If the company does poorly, your stock will lose value.
Most people buy stocks to make money on selling them, but there are several other reasons to purchase stocks. One is that some stocks pay dividends when a company meets certain goals. Stocks are also often used as a part of investment programs like IRAs. Finally, some people choose to buy enough stocks because they want a say in the company.
What is Forex Trading?
The foreign exchange market is international, which allows traders to buy and sell currencies like the Euro, U.S. dollar, and the British pound. Forex is a decentralized market, meaning nobody is buying or selling currencies in a physical location. Instead, all of the trading takes place virtually over the internet.
Each day, over $5 trillion is exchanged on the foreign exchange market, making it the largest market in the world in terms of volume. A wide variety of market players trade forex, from individuals to banks and major corporations.
Differences Between Forex and Stocks
As we’ve discussed, there are a number of variables traders must consider when deciding which market they’d like to trade on. While both forex and stock exchanges have these same variables in common, the differences lie in how each market is affected by each variable.
Most stock exchanges are open during regular business hours. For instance, the New York Stock Exchange is open Monday through Friday from 9:30am to 4:00pm. This is partly due to the fact that stock exchanges are physical places where people actually work.
Forex trading, on the other hand, is open 24 hours a day. Since forex is for trading currency, it’s necessary for it to be open at all hours of the day. It’s also a market that is exclusively virtual, so there’s really no reason for it to close.
It sounds contradictory, but the stock market is often described as “consistently volatile”. That means, by nature, it tends to be at least somewhat volatile all the time. Forex trading tends to be relatively stable most of the time. The trade-off is that on the rare occasions when forex does become volatile, it is usually quite extreme.
When you trade the stock market, you almost always have to pay a broker a commission in addition to the usual spread. In forex trading, most brokers do not charge an extra commission. Instead, they make their money on the spread you’re already paying.
Although many factors can affect the stock market, when you see the price of an individual stock change drastically, it’s generally because some type of information was released about that company. The foreign exchange market doesn’t rely on any one company. Instead, it’s affected by things like world events or natural disasters.
Leverage is the amount of money you’re allowed to trade versus how much money is in your account. The amount of leverage available to traders in forex and stock trading is drastically different. In the United States, traders using the foreign exchange market are limited to a 50:1 maximum leverage, but some countries allow up to a 500:1 ratio. By contrast, the leverage allowed in NYSE stock exchange transaction is only 2:1.
Liquidity in forex is high by nature, so traders in this market are able to buy and sell large amounts of currency fairly quickly and without it having a major impact on the market as a whole. Regular stocks are usually not nearly as liquid because they are much more finite by nature.
There are thousands of stocks on the NYSE alone, without even considering how many there are in other stock exchanges. Forex mostly revolves around eight major currencies, which makes it much easier to concentrate on than the stock market.
Which is Better: Forex or Stocks?
The thing about forex and the stock market is that one really isn’t “better” than the other. What type of trading is right for you depends on your long and short-term goals, your trading style, and how much money you’re willing to risk.
At the end of the day, the stock market is great for long-term investments but can also be used to suit the needs of a day trader. It’s perfect if you’re available during normal work hours and have a decent amount of capital on hand.
Forex is good for making money quickly, and ideal for traders with a smaller portfolio. Plus it’s open all the time, so it’s a good fit for traders who have day jobs that prohibit them from being able to trade during work hours.
Regardless of which market you’d prefer to trade in, the real secret is knowing how to look for the patterns that show you when it’s time to make your moves. I struggled with this for years before I figured it out, and now I dedicate my days to helping new traders avoid that struggle and become successful traders in record time. If you’re ready to stop wasting time, Day Trader Architects has the classes you need to get rolling.