Whenever it comes to trading, stocks and forex are two of the names that we get to hear about. But as a newbie trader, which market should you really prefer? Or which should you trade?
Well, in this article, I will be answering this question only. I will try to draw a comparison between stocks and forex and help you to pick the right market for trading.
Although, both of the markets come with the best advantages and both of the market price changes constantly. As a result, you will be able to make money on both of the markets.
But having a deeper understanding of markets would only help you to do things in a better way. So let me just go ahead and explain everything to you:
Similarities between Forex and Stocks
Usually, we compare both markets by drawing a difference, but both Forex and Stocks have some similarities.
In both markets, traders need to get indulged in taking advantage of short-term shifts to generate profit. Also, just like stocks trading, the traders need to have their faith in technical analysis to find trading opportunities and find the market’s direction.
Also, trading both forex and stocks requires a strong fundamental understanding of how markets work and practice in order to turn a consistent profit.
Also Read: What is Forex trading?
Differences between Forex and Stocks
Currencies Come in Pairs
One of the biggest differences between the stock market and other markets is that you don’t have to choose whether you want to buy or sell. But you are doing both at the same time.
But in the forex market, whenever you make a trade, you are always buying one currency and selling the other. This is because currencies are always traded in pairs.
The reason behind this is pretty simple. In the stock market, when you sell a stock, you are exchanging it for money. But in the forex market, money itself is a commodity that is being traded. As a result, you are simply one currency for another.
And the currency you are giving away is considered sold, and the currency you are getting is referred to as bought by you.
No Centralized Exchange
As you already know that stock markets all over the world work under a centralized governing body. And this body is often known as an exchange which is responsible for all the trades taking place in the market. Also, it offers an effective prevention mechanism.
Also, an exchange ensures that all the parties entering into a trade honor their commitments, and they do it via risk reduction mechanisms.
However, when it comes to the forex market, there is no centralized exchange. As an exchange, it will find it difficult to function given the width and breadth of Forex trading that happens in the world.
As a result, the forex market has a high risk. Since there is no centralized body that is mitigating the risk for you.
Another important fact that you should know about the forex market is that there are no brokers. As a result, there is no commission to be given.
Forex market is run by market traders who provide two-way quotes. And the only difference between buying and selling price is called their spread and that is what intermediaries in the Forex market earn.
Also, there is no broker in the forex market who charges a fixed commission. Even the intermediaries in the Forex market obtain a reward if they bear risks i.e. hold the volatile currency for a short period of time before they can find another buyer.
Dual Role of Central Banks
The central banks of all the nations are the major participants in the Forex market. These banking institutes are backed by huge capital backing. As a result, they do have the power to dent the market if the need arises.
Also, they can control the underlying commodity being traded. As a result, these banks play a dual role in the market.
Lastly, there are no regulations in the forex market. As a result, if a trader wants to obtain insider information about currencies being traded and used then to make a huge sum of money, there would be no legal repercussions.
Even in the past, many private investors have supposedly used insider information from the markets to gain profit within a few trading sessions.
Also, as there is no regularity body, hence there are no limits to trading. Plus, there are no restrictions on the amount of money that individuals can invest in the market in one go.
Forex vs. Stock Trading: which should you trade?
The answer to this question completely depends on your goals as a trader, your trading style, and how much risk you can take.
If you talk about the forex market, it offers you far more leverage and fewer regulations than stock trading. As a result, it makes the forex market highly profitable but with high risk.
But on the other hand, tracking the forex market is much easier than tracking stock markets. As there are only 18 common pairs of currencies to trade. Instead of tracking thousands of potential stocks.
Another drawback of forex trading compared to trading is that it takes place 24 hours a day. As a result, you may need to be working at odd hours to realize certain trades and that the market is still changing whenever you are not working.
However, in the end, it is completely up to me. Any market that suits your trading style is the best one. Also, if you don’t want to take a huge risk then the stock market would be a good option for you.
Also See: How to start Forex Trading? — A Guide
So that was a quick comparison between forex and the stock market. Now it is your call to choose the right trading market for yourself. Also, trading in both of the markets involves high risk, so only get into a market once you fully understand it. Anyway, for any other questions do comment below.