It’s never been easier to earn money from trading. Advances in online brokerage accounts and charting software mean that you can earn money trading from the comfort of your home or office — it’s no longer confined to Wall Street.
When most people hear the word “trading,” they immediately envision the stock trading market. However, forex trading makes waves among investors as the market opens to more and more traders. But which is right for you — stock trading or forex trading? We’ll take a closer look at the similarities and differences between stock trading and forex trading. We’ll show you the pros and cons of each trading type and help you get started trading your asset of choice.
What is Forex Trading?
The word “forex” is short for “foreign exchange.” Forex trading is the process of buying and selling different currencies. You might sometimes hear traders refer to forex trading as “currency exchange” or “FX trading.” Most countries issue their own currency. The value of each currency varies in relation to one another. If you’ve ever traveled abroad, you might have converted a small amount of cash into the country’s local currency and found that your money went further than it would at home.
For example, if you travel to Vietnam, you might find that a single U.S. dollar is worth over 23,000 Vietnamese dong. You might pay 5,000 Vietnamese dong (about 20 cents) for a bottle of water that would cost you $2 U.S. if you bought it somewhere in the United States.
Forex traders take advantage of this difference in value by strategically exchanging their native currency for foreign currencies. The goal of forex trading is to buy a currency when it’s undervalued and sell it when it rises in value in relation to the native currency.
What is Stock Trading?
Stock trading involves buying and selling individual shares of a company, called “stock.” A share of stock is a small piece of ownership in a company. Like currencies, shares of stock can fluctuate in price throughout the day, week and month. Factors like a company’s management team, the overall state of the economy and the business decisions the company makes can all influence what each individual share of stock is worth.
Stock traders aim to buy a stock when it’s undervalued and sell it when it rises in value. There are 2 main types of stock traders who exchange stocks for profit:
- Active traders are stock traders who attempt to time the market on a month-to-month basis. They may place 10 or more trades a month, and they may hold their stocks for weeks at a time before they decide to sell. Most active traders consider things like the board of directors and the future of the company when they decide which stocks to buy and sell.
- Day traders are stock traders who take advantage of short-term price movements. Most day traders don’t hold onto their shares of stocks for more than 1 or 2 days at a time. Many day traders sell their stocks a few hours after they buy them. Day traders don’t usually care about the inner workings or boards of the companies they buy shares from — they only care about the volatility and daily fluctuations of these particular companies.
Similarities Between Stock Trading and Forex Trading
Stock trading and forex trading are similar in a few regards. Let’s take a look at some of the similarities between these two common trading arenas.
Brokerages
A broker is someone who buys or sells an asset on your behalf in exchange for a small fee or commission. Both stock trading and forex trading use brokers to facilitate your transactions. You can quickly create a brokerage account online and begin trading as soon as you fund your account. While most U.S. brokerages will offer access to the stock market, not every broker services forex transactions. To learn more about brokerages that offer access to forex trading, check out our list of the top forex brokers.
Short-Term Trading
Both forex traders and stock traders rely on relatively short-term trading strategies. A stock trader who’s trading with the intent to make a profit usually won’t be interested in holding onto his or her stock for years to come. Similarly, a forex trader only wants to hold currency until he or she can exchange it for a profit in his or her base currency.
Technical Analysis
Technical analysis is a type of financial analysis that uses patterns and indicators to inform a trader when he or she should buy or sell an asset. Traders who use technical analysis to inform their trading strategy typically don’t spend a lot of time reading the news or researching a company’s business plan. Instead, they may look at candlestick charts for indicators that a stock or currency will drop or rise in price soon.
Both forex traders and stock traders primarily rely on technical analysis when they decide what they should buy or sell. Because the price of a stock or currency may change on a minute-to-minute basis, it’s important that you have a reliable technical analysis program to inform your trading.
Differences Between Stock Trading and Forex Trading
Forex trading and stock trading also have a number of key differences you need to understand. Let’s take a look at some of the largest differences.
Leverage
In the world of trading, “leverage” is the power to open a position that’s larger than the capital in your account. You might hear some traders refer to using leverage as “trading on the margin.”
Leverage is usually expressed as a ratio. For example, let’s say that you have $100 in your brokerage account and your broker offers you 100:1 leverage. This means that for every $1 in your brokerage account, you can trade with the power of $100. If you have $100 in your account and 100:1 leverage, you can place a trade worth as much as $10,000.
Leverage is a crucial part of forex trading because currencies usually don’t see massive fluctuations in price. It’s normal for a currency to increase in value by just $.0003 in a whole day. This means that you’ll typically need at least $100,000 to invest to see any type of significant profit on your trades. Leverage makes it possible to profit on forex trades without having hundreds of thousands of dollars to invest. On the other hand, leverage is also risky and can quickly wipe out your deposit if you don’t make smart trades.
Leverage is rarer on the stock market. You may only be able to find 2:1 leverage with many brokers. However, stocks also move in value more dramatically, which means that you need to invest less to see a profit.
Trading Hours
The forex market isn’t centered around a single time zone or set of hours. Each forex market has its own hours of operation. Let’s take a look at when a few of the world’s largest stock markets are open.
- New York opens at 8 a.m. EST and closes at 5 p.m. EST.
- Sydney opens at 5 p.m. EST and closes at 2 a.m. EST.
- Tokyo opens at 7 p.m. EST and closes at 4 a.m. EST.
- London opens at 3 a.m. EST and closes at noon.
You can see the highest liquidity when trading hours overlap. However, the forex market is technically open 24 hours a day except on the weekends because there’s a global demand for currency that isn’t limited to a single time zone.
When most people talk about stock trading, they’re referring to trading on the New York Stock Exchange (NYSE), the largest exchange in the world. The NYSE is open from 9:30 a.m. EST to 4 p.m. EST Monday through Friday. The NYSE is closed during the weekends, and it’s also closed during major American holidays (like Christmas and Labor Day).
Market Size
Many traders prefer the forex market thanks to its massive daily trading volume. Every day, the forex market sees about $5.1 trillion worth of trades. This makes the forex trading market the largest exchange in the world by far.
The stock market is significantly smaller than the forex market. The NYSE sees about $169 billion worth of trades each day it’s in operation. Though this number doesn’t include the daily trading value of foreign markets, the stock market still pales in comparison to the size of the forex market.
Pros and Cons of Stock Trading
Before you decide to start stock trading, be sure you consider the pros and cons of entering the market.
| Pros | Cons |
| Easier to get started. Almost every brokerage in the United States offers some form of trading on the NYSE. This means that you’ll have more choices when it comes to your broker and more control over which platform you use. A massive number of stocks to trade. There are currently more than 2,000 different stocks listed on the NYSE and more than 3,000 stocks listed on the NASDAQ. This gives you plenty of options when it comes to choosing where to invest your money. Higher volatility. As a general rule, stocks tend to be more volatile than currencies. It’s normal for a stock to rise or drop up to 5% in value each day, while a currency may rise or fall by only a fraction of a penny. This allows you to earn more of a profit without using leverage. | Pattern day trading laws. The stock market is regulated by the Securities and Exchange Commission (SEC), which regulates who can trade and when. Under SEC rules, only traders who have a portfolio balance of $25,000 and above can place more than 3 day trades a week. Limited hours. The major stock exchanges are only open on weekdays from 9:30 a.m. to 4:00 p.m. If you live outside of the United States (or on the West coast) you might have trouble finding time to trade during the most volatile parts of the day. |
Pros and Cons of Forex Trading
Forex trading also comes with a number of unique pros and cons.
| Pros | Cons |
| Fewer trading options. Are you overwhelmed by the number of stocks available to trade? There are only a few major currency pairs so you can compare all of your options. Lower financial bar for entry. Unlike stock trading, there’s no legally-regulated minimum balance you need to get started. When you take leverage into account, it’s possible to get started with as little as $50. More liquidity. In order to sell a share of stock, someone else on the market needs to want to buy it. Most forex transactions are filled instantly thanks to the massive daily trading volume and near-constant demand of the currency market. | Danger of leverage. Leverage can be a powerful trading asset, and it’s almost always a necessity to trade forex. However, leverage can also quickly wipe out your initial deposit if you make a single bad trade. Fewer platform options. Not every brokerage firm offers forex trading. This means that you may have limited options for which platform you can use. |
Choose the Right Trading Style for You
Whether you decide to start stock trading or forex trading, you’ll want to make sure that you have a strong technical analysis background. Both forex trading and stock trading rely heavily on short-term price movements, so an up-to-the-minute charting software is an absolute must-have. Be sure to learn more about how you can get free forex charting software or the best stock trading software before you invest your money.
https://www.benzinga.com/money/stocks-vs-forex/
2020-02-07 18:38:11Z
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