Handy Explains Key Differences Between Forex and Stock Trading
According to Handy, forex and stock are both hugely popular global markets for trading and learning about their key differences would allow you to understand which would be a better fit for your trading strategy and risk appetite. There are definite pros and cons associated with each market and it’s important to educate yourself thoroughly before becoming a trader.
Here are a few key differences between forex and stock trading:
- What you are trading – The primary difference between forex and stock is what you are trading. Forex, (A.K.A foreign exchange) involves the trading or buying and selling of currencies. Whereas stock trading involves the buying and selling of shares (the units of ownership in a company).
- Market trading hours – Before you decide to start trading, it is important to note the opening hours of the market since it affects the time you would need to spend monitoring the market.
Unlike share trading which is limited to the opening hours of the exchange that it is listed on, forex is an over-the-counter market. Thus, share trading usually lasts only 8 hours a day whereas forex trades happen 24 hours a day, 5 days a week since it’s a global market.
Thus, although forex provides more flexibility for trading, it also involves the risk of you incurring a loss when you are not actively monitoring the market. Thus, it’s important to create a risk management strategy when dealing with forex.
- Liquidity – Liquidity is important to consider since it decides the ease at which you can buy or sell an asset. The liquidity of a market depends on its volume. Forex has very high liquidity, with low transaction costs and extremely low spreads since it’s the most popular financial market in the world. In fact, the daily turnover in forex easily reaches trillions of dollars.
The stock market is much less liquid when compared to forex but it is still easy to access and trade in it, especially with popular and large stocks such as Facebook, Microsoft, Apple, and more.
- Market influences – Both forex and the stock market are influenced by supply and demand but there are a lot of other factors that play a crucial role in setting the price. For instance, when share trading, you need to research and focus on all the factors that can directly affect the company you have purchased stocks in. These include information about the company’s cash flow, debt levels, earnings, and more. Additionally, you can get a more well-rounded picture by investigating the sector’s health, news reports, and economic data.
However, when dealing with forex, you need to consider the macroeconomics of the country such as inflation, unemployment, inflation, gross domestic product (GDP), political events, and news events as well. And you need to be aware of the performance of the country of both the selling currency as well as the buying currency.
Handy believes that forex is better suited for short-term traders that prefer a fast-paced environment such as scalp traders, day traders, or swing traders. On the other hand, traders that want less volatility and want to leverage on mid-term goals should deal in stocks.