One of the most frequent questions we have received is ‘What is the difference between Forex and Stock?’
Before you make up your mind on which market to trade, various factors should be considered in order to get the most out of your investment. So, here’s the 4 differences between these two financial markets.
First, what is stock?
A stock is a general term used to describe the ownership certificate of any company. A share, on the other hand, refers to the stock certificate of a particular company. If you are holding a particular company’s share, this makes you a shareholder.
But, “how do I earn through stock trading?” The price of the stock relies heavily on the supply and demand on the market. Let’s say if there are a lot of people buying that stock A (demand) and sell it (supply), then the price goes up. Conversely, if more trader on the market wants to sell stock A than to buy it, there would be a greater supply than demand, causing the price of stock A to fall. Stock traders earn the difference in the stock price throughout the buying and selling process which heavily dependable on the prospect of the company.
Then, what is Forex?
As we all know, Forex stands for foreign exchange and Forex trading is used to describe the trading in the currency market by investors and speculators. Forex traders earn through the fluctuation of the foreign currencies they buy or sell in the market. For example, if a trader expects the Euro to strengthen against the US dollar, they will sell dollars to buy Euros. If the Euros strengthens, traders will then sell Euros for dollars and thus increase the initial sum they have in the dollar.
With an average of $3.98 trillion dollars of currency trading on the market every day, the Forex market is the largest financial market compared to others. The higher the liquidity of the market, the easier to trade the instrument, and the little the price change when you sell your currencies. Compared to the stock market, the level of liquidity is significantly lower than the Forex market, it makes the investment to be higher risk and might cause the market orders failed to be filled instantly or at the desired price.
The number of trading alternatives available on the Forex market is lesser, compared to the stock market. With thousands of trading alternatives on the stock market, it increases the difficulty for you to find an investment portfolio that suits you but with only four major pairs on the Forex market, studies and researches become less confusing and it is easier for you to focus on your trading.
Round-the-clock trading (24-hour market)
In the stock market, trading sessions are only limited to the exchange hours which is 9.30AM to 4 PM Eastern Standard Time (EST), Monday through Friday with the exception of market holidays. But on the other hand, the Forex market is a seamless 24-hour market, from 5 PM EST Sunday through 5 PM EST Friday. The flexibility of the Forex trading hour has added bonus to traders whose schedule would limit their trading activities. As it is a 24-hour market, the gap risk in Forex market is greatly decreased by the fact of only fewer market closes at the same time.
Leverage is often a major key point for trading, it allows you to deposit a smaller amount of money but still can have a larger position to see significant changes in the market. The leverage given by the stock market is normally around 5:1 but in the Forex market, it is usually 50:1, ten times more than the stock market. At TriumphFX, we offer leverage up to 1:500 based on investor’s experiences.
Minimal / No commission
The fee and commission are different between stock and Forex market too. Stockbroker usually charges you a percentage of your total trade size or a flat fee as a commission but in the Forex market, broker only charge the difference between buying and selling prices of the currency pair (known as spread) and based on the lot traded.
Now you know both markets have their pros and cons and it is your call to decide which market suits you the most. After all, a stock represents one company, in one economy of the entire world, whereas a currency represents an entire economy. No matter what kind of market you decided to trade, please remember, trading is all about self-discipline and great perseverance.