Whilst the general concept of trading on a volatile market is the same, trading the stock market and the Forex market are two very different things.
What is Forex trading?
The Forex trading market, is a decentralised global market where all the world’s currencies trade. The Forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. It is the same concept as trading stocks; if you think the value of something will increase, or decrease you can trade it based off those assumptions. But the big difference with Forex is that you can trade up or down just as easily. Because of the high leverage that comes with Forex trading, you can trade with relatively little money compared to the stock market. You could open a Forex account with £250 and see more growth than you would opening an equity account of that size. Forex trading is a much quicker process, as it is a 24 hour market and your trades are executed instantly. There is also little to no commission when trading the Forex market, compared to brokers in the stock market taking a high fee. But unlike stocks where you trade based on shares of a company, you trade in currency pairs; essentially betting on the strength of one currency compared to the other in the pair.
What is the Stock Market?
The stock market refers to the collection of markets and exchanges where the regular activities of buying, selling and issuance of shares of publicly held companies take place. For example, if i think the value of a Tesla share will increase, I will buy shares in Tesla, and sell when the value of the shares has increased to a level that I am happy with. (Much like the concept of Forex). Shares are often influenced mainly by the investors and not the company itself; essentially the value of a stock is as much as the investors think it is worth. According to Investopedia, “as a primary market, the stock market allow companies to issue and sell their shares to the common public for the first time through the process of initial public offerings (IPO). This activity helps companies raise the necessary capital from investors. It essentially means that a company divides itself into a number of shares (say, 20 million shares) and sells a part of those shares (say, 5 million shares) to common public at a price (say, $10 per share).” And if everything goes to plan, they will end up receiving $50 million in funding from those sold shares.
Forex vs Stocks
- Forex is a 24 hour market.
- Forex has little commission.
- Orders are executed instantly in Forex.
- Forex trading can be more complex as pattern recognition skills are useful; and not everyone has them.
- Stocks are often less volatile, and you can lose less when trading stocks where as your losses may be magnified because of high leverage in Forex trading.
- Its easier to short trade with Forex.
- Currencies react more directly to macroeconomic news and economic data than individual stocks.
- If you have a low risk tolerance, stay away from Forex trading.
- Many Forex trades can be made in 1 day without building up a large brokerage fee.
- Forex is more predictable than stocks; it follows well established trends.
- Forex doesn’t require a large investment to get you started.
Which one is for me?
If you are starting off with a relatively low investment and you don’t mind taking risks, I would recommend trading Forex. Forex is easier to manage your life around too, as the market is open 24 hours a day. If you are wanting a little bit more *security on your trades and you have more money to invest, (and you’re willing to be patient), I would recommend you trade stocks as they’re more “long term investments.”
*I just want to add, when trading currencies or stocks there is little to no security/guarantee that you will see profit or even get your money back. Trading comes with big risk, and you can lose lots of money if you don’t know what you’re doing.
