Today’s guest post comes from David Webb – a business consultant from Sydney and regular contributor on BizzmarkBlog. Since I talk a lot about stock trading, it’s important to remember there are other trading options, such as forex. Knowing the differences between stocks vs forex helps you decide which is better for you.
Due to the influence of mainstream media and television, we have a somewhat peculiar view on how the stock market works, or any other exchange market for that matter.
The most iconic scene of them all is the scene from the movie Trading Places when Eddie Murphy’s and Dan Aykroyd’s characters sell their frozen orange juice commodities to an angry mob of traders and get filthy rich in the process. The scene in question looks more like some Black Friday news footage than a sophisticated trading operation with millions of dollars at stake. And truth be told, that’s the general consensus on how the exchange market is perceived on film.
However, is it really like that? But what about Forex trading?
Nobody ever seems to mention it on screen even though it’s officially the most liquid market on the planet. Therefore, let’s dive a bit deeper and get to the bottom of this conundrum once and for all.
Stocks can be traded in two ways: physically, on the exchange floor or electronically.
Trading on the exchange floor usually takes place in either New York or London stock exchanges. Here, trade is most commonly conducted via a live auction, where buyers and sellers place their respective bids and offers. Of course, there’s also the electronic option, which isn’t tied to any particular location and matches buyers and sellers automatically.
However, in both cases, traders need a certified broker to make the actual exchange. Forex trading is a lot more accessible since it is over-the-counter and not as regulated, meaning that anyone willing to dabble in it is free to do so and can conduct their own trade personally.
Brokers and Leverage
As mentioned above, finding a broker is mandatory for stock trading as uncertified individuals don’t have access to the stock market. As a result, the percentages or commissions that brokers charge are much higher with stocks than with Forex trading. They also vary from broker to broker.
Moreover, Forex trading is a lot more transparent and individuals can trade on their own.
Despite this, the profit margins are much lower with Forex trading, as the paired currencies usually only differ by a few pennies, hence it requires leverage in order to be effective. With stocks, it’s a different story. The average leverage ratio is around 2:1 for stocks. For Forex, it generally ranges from 50:1 (USA) to 200:1 (abroad), which is a considerable difference to say the least.
Because of the sheer amount of money involved with these leverages, there are many shady brokers lurking out there, trying to find ways to scam or trick users. For this reason, you need to be extra careful when searching for a reputable Forex broker to avoid any unwanted shenanigans.
Stocks trading has increased in liquidity over the years thanks to constant technological advancements. Yet, it still falls behind Forex trading, which is the most liquid market out there with 5 trillion dollars traded on a daily basis.
Some of this has to do with the trading hours. Stocks are traded between 9:30AM and 4PM while Forex is conducted twenty-four hours a day during the work days and closes on weekends.
Furthermore, supply and demand has a huge impact on the stock market, which isn’t the case with Forex. For example, moving a lot of shares can cause the price to fall or rise quite significantly with stocks. With Forex, even if you exchange a few million dollars worth of currencies, it won’t affect the price as much. This is because it’s almost impossible to ‘run out of stock’ with currencies, meaning their price isn’t as sensitive.
When general strategies and the overall complexities are considered, Forex trading is more newbie-friendly than stocks, which has a much higher learning curve. This is because there are only four major currency pairs you need to focus on. USD/EURO, GBP/USD, USD/JPY, and USD/CHF.
Of course, there are other cross currencies you can keep an eye on, but the safest and most common method is to simply focus on these four. As the price of a currency is directly linked with the geopolitical stability of a country, the country’s GDP, and inflation rates, it’s imperative that you keep an eye on these variables for both countries of your chosen currencies. Logically, this leaves you with eight countries you need to keep track of. Compared to the thousands of stocks you need to monitor, that’s nothing.
All in all, there’s no definitive answer which of these is better as both have their own pros and cons. Although they may look similar in some aspects, the way they operate is somewhat different. The most noticeable difference being that Forex trading is more accessible than stocks, but at the end of the day, both are still quite unpredictable.
About the Author
David Webb is a Sydney-based business consultant, online marketing analyst, and writer. With a degree in online business strategies, he seeks to help people better understand this new digital age. In his free time, David enjoys writing, traveling, basketball, and an occasional night out with his friends. You can connect with David on Facebook or Twitter.