Forex Vs Stocks: What’s the difference?
The foreign exchange market (forex) is where traders/investors can trade currencies. It is a highly liquid market that sees about $5 trillion in transactions everyday. A number of factors determine exchange rates between two currencies and governments manipulate these exchange rates by applying economic pressure to allow them to take advantage of trade levels.
The stock market on the other hand is an equity market that sees about lower volumes than the forex market. Investors and traders can transact equity assets of listed companies on the stock market. The stock market unlike the forex market is regulated. In Australia, ASIC is the regulatory body that supervises the trading activities.
Forex Vs Stocks: Trading Hours
The forex market is a 24 hour over-the-counter market. The advantage here is that a trader can enter or exit positions from anywhere at any time.
The stock market on the other hand is open during the trading hours set by a stock exchange – which is usually around 8 hours a day in most major stock exchanges.
Forex Vs Stocks: What Influences These Markets?
Forex market allows the trading of currencies. Macro economic factors such as trade levels, inflation, employment, interest rates, growth rates and geopolitical conditions determine the value of a currency.
Equities derive their value from fundamentals that determine cash flows, growth and risk associated with the company. Stock prices however, are subject degrees of volatility as mood and momentum of traders affect stock prices in the short-term.
Pros and Cons of Forex Market
All the factors that determine the value of currency is the risk associated with trading in the forex markets. Country risk is ever present in forex markets. Currencies react directly to macro-economic factors.
The biggest advantage of forex trading is the high level of liquidity that is in the market and the leverage available to traders.
Pros and Cons of Stock Market
Not all assets in stock markets react directly to macro economic factors. The risks an investor is exposed to are two types – market risk and firm specific risk. While an investor can reduce firm specific risk by diversification of their portfolios, they cannot reduce market risk without the application of hedging strategies.
Should You Trade Forex or Stocks?
Forex markets and stock markets have their own advantages and disadvantages. There is no definitive answer on what is best for you. It depends on a lot of factors and varies from investor to investor.
