The interest of traders in the stock and forex market is increasing daily. These are great ways to invest your money and make big amounts of profit. However, traders tend to confuse which market to choose. In this article, you will find out stock vs. forex trading: which is more profitable.
What is the stock market?
Stocks are the way to invest in a particular company. It can be referred to as a small amount of capital or share in the company.
Buying a stock means you have invested in the company, and now you have become a shareholder.
So you can make a profit when there is an increase in the company’s value.
Stock Market is the place where buying and selling of stocks, bonds and securities take place. To raise their capital, companies invite the general public to invest in them and make money.
Different stock market exchanges, such as the New York Stock Exchange, London Stock Exchange (LSE), Tokyo Stock Exchange (TSE), etc., provide traders with a platform to trade in stocks.
There are thousands of companies listed on the stock exchange. However, common people generally invest in major companies such as Microsoft, Apple, Tesla, Amazon, etc.
A quick glance
Stocks are the way to invest in a particular company. It can be referred to as a small amount of capital or share in the company.
In the fx market, traders buy and sell currencies to take advantage of the changes in their value.
In the forex market, traders invest in currencies to take advantage of price fluctuation. Meanwhile stock market, shareholders invest in companies to earn profit.
Profit depends on your investment amount; for short-term investment and higher returns, you should go for the forex market, and for long-term investment and stable return, you should go for the stock market.
What is the Forex Market?
Forex Market is the short form of the foreign exchange market. In the fx market, currencies of respective nations are exchanged for several purposes such as travelling, trading, import, export etc.
Forex trading is quite similar to stock trading. However, traders invest in countries’ currencies instead of companies’ stocks to make money from exchange rate fluctuations.
In simple words, in the fx market, traders buy and sell currencies to take advantage of changes in their value. Currency value changes due to changes in a currency’s economic, political, social and technological status.
EUR/USD, JPY/GBP, and AUD/NZD are popular examples of currency pairs. Currencies are traded in pairs; you will get one currency in exchange for another.
There are more than 180 legal currencies and several currency pairs. However, traders tend to invest their money in strong currencies such as US Dollars, EURO, Great Britain Pounds, Japanese Yen, etc.
Stock vs. Forex trading
To help you in determining in which market to trade forex or stocks. Here are some key points of difference between stock vs. forex trading for beginners to identify which market suits their needs.
Regulations in forex vs. stocks
Stock Market is well regulated by the government of respective countries. Each country has its stock exchange to regulate trading in the stock market. These institutions regulate the stock market activity and make efforts to protect investors’ interests.
For example, In the United States, stock trading is well-regulated by its Securities and Exchange Commissions. The organization monitors and regulates the securities market in the country.
Unlike the stock market, the forex market has no physical location or central authority to regulate currency trading activities.
It is an over-the-counter market, which means currencies are traded online on digital platforms. In some countries, forex trading is legal, while in some, it is not.
Governments have set up institutions to regulate currency trading in the countries where it is legal. Due to the absence of central authority, regulation in the forex market is comparatively weak.
Time frame in markets
Trading in Stock Market takes place during exchange hours. There is a market opening and closing time, which means you can trade only within this time. Generally, the trading hours of the stock market are 9:30 A.M. to 4 P.M. EST.
Unlike the stock market, the forex market is a 24-hour and 5 days market. FX market has four sessions. Each session has its timing. As a result, at any point in the day, a session will be open.
Forex is an OTC Market, so you can trade within any session using the trading platform. Usually, on weekends and holidays, currency trading is affected.
Factors affecting trading in Forex stocks
In the stock market, as you are investing in a company, the trading is affected by the factors such as the company’s reputation, demand and supply of products and services, import and export and its financial statements such as balance sheets and cash flow statements.
In the forex market, currency trading is affected by social, political, technological and economic factors such as Interest rate, inflation, CPI, Poverty, government change, central bank policies and the overall financial health of a country.
Volatility in Stock Vs. forex trading
Volatility means the rate of price change of the assets to take advantage of fluctuations. In the stock market, price change less rapidly. As a result, there are comparatively fewer short-term trades taking place daily.
In the FX market, many day traders and scalpers make 3 to 5 trades daily as the price changes very frequently of the currency pair. So short-term traders can take advantage of short-term price fluctuation.
Liquidity in stock vs. forex trading
Liquidity means the ease of converting the asset into cash. Simply, it refers to how quickly you can get your money when in need. The lesser the market volatility lesser the liquidity, and vice versa.
Stock Markets are comparatively less liquid due to their low volatility and trading volume. Also, the buying and selling of stock is a time taking process.
Daily around 6 trillion transactions take place in the forex market. Buying and selling currencies also takes place in comparatively less time. So, FX Market is more liquid and more volatile.
Forex market vs. stock market size
There are many companies globally in the stock market, so the size of the stock market depends on the country. The market offers infinite opportunities.
As per the information, more than 2800 stocks are listed on New York Stock Exchange. Similarly, each exchange has its listed stocks. So you can say that there are thousands of stocks to choose from.
Forex Market is the largest financial market; over 6 trillion dollars are traded daily. You can trade in more than 170 legal currencies.
However, it is easy to choose currency pairs in the FX market as people usually trade in the major 7 currency pairs, and the US Dollars dominates the market. That is why forex is better than stocks for beginners, as you can select the pair easily compared to stock.
Leverage in Trading Stock vs. Forex
Stock Market offers comparatively less leverage than the forex market. You can get leverage as high as 1:50, 1:100, or 1:500 against your capital in the fx market.
However, remember higher the leverage, the higher the risk. So this advantage of high leverage may turn into a disadvantage for traders. It is advisable not to go for unusually high leverage.
Capital requirements
The major point of difference between the stock and forex markets is capital requirement. Trading in the stock market requires comparatively high amounts of capital and account balance. So it is not suitable for retail traders or traders with short-term capital.
In the Forex market, the capital requirement is comparatively less. Even the price of currency pairs changes frequently. So it’s suitable for retail and day traders to make money with small investments.
Diversification
In the stock market, it is usually good to make your investment diverse, which means investing in stocks of different sectors and regions to manage the risk. So when you have suffered a loss from one stock, you balance it with profit from other investments.
Meanwhile, in the forex market, it is best to select a particular currency pair. As price changes frequently in the market investing in different currency pairs makes trading more complex.
Conclusion
The answer to Stock vs. Forex trading: which is more profitable depends on your investment amount. The Forex market offers high volatility, liquidity, leverage and good trading volume.
So if your investment amount is small or you are a short-term trader, you should go for the forex market. The amount of profit is also comparatively high in high volatility.
However, if you are a long-term trader or your investment amount is big, you should go for the stock market, as profit in stock trading is more stable and consistent.
Also, the forex market frequently changes, so continuous monitoring is essential compared to the stock market. Whether it is forex or stock, the risk is involved in both markets, and also, the chances to earn high profits.
