The Differences Between Stock & Forex Trading
Trading financial markets revolve around the same concept – buy low, sell high. But while most novice and intermediate traders have the preconception that they can easily transition or expand to new markets with minimal to no adjustments necessary, there remain quite significant dissimilarities between the stock and forex markets.
Why Should You Know It?
If the core principles of supply and demand stand as the earmark of all financial markets, why should you invest time and effort relearning about new markets? The answer is fairly simple – to make the most informed investment decisions possible. The economic catalysts that drive market prices vary between forex and stocks. While these respective markets do have similar economic forces that affect the pricing of underlying assets, it’s not entirely similar. Failure to recognise and prepare for these differences leaves holes in your trading business. Such holes can be costly and sometimes even financially disastrous.
What is Stock Trading?
In a nutshell, stock trading, also known as equity trading, involves speculation of company stock prices. An exchange is established wherein buyers and sellers can meet and decide on the price they wish to buy or sell a certain stock or basket of stocks. In the olden days, stock trading could only be conducted via physical exchanges or pits that encapsulated the chaotic transactions between buyers and sellers. While such exchanges remain vibrant today, most traders and brokers are managing their interests via the Internet.
What is Forex Trading?
The definition of forex trading is not a far cry from that of stock trading. The only obvious difference, however, is that forex trading involves currency trading and speculating the direction of foreign currencies including, but not limited to, US Dollar, Japanese Yen, Eurozone Euro, and British Pound. Forex trading can be further broken down into spot or retail forex exchange trading and futures exchange trading, the latter of which involves predicting the future prices of an underlying asset.
Key Differences Between Stock and Forex
Different assets are traded between buyer and seller in these two markets. The stock market regulates and transacts stocks of registered companies, such as BHP and Rio Tinto. The shortened form of their names is called Ticker Symbols, which represent the company’s stock on physical exchange screens and online trading platforms. On the other hand, forex trading involves buying and selling currency pairs, meaning two assets are being transacted. For example, buying a major currency pair such as NZD/USD, regardless of amount, means you are buying New Zealand dollars while simultaneously selling US dollars.
It can be difficult to trade stocks in that multiple stock exchanges around the globe carry an equally myriad number of tradable assets, such as those listed in S&P 500 or FTSE 100. Meanwhile, foreign exchange has only three major pairs that receive the majority of daily liquidity, namely EUR/USD, USD/JPY, GBP/USD or AUD USD. Other major and cross-currency pairs like NZD/USD or GBP/AUD play an equally important role, though. For a novice or even an intermediate trader who does not yet have the mental faculty nor the technical tools to keep track of multiple assets, forex tends to be a better fit.
The user interface of most stock trading platforms is overwhelming and seemingly out of a Sci-Fi film, many times needing the assistance of a financial advisor. There are a variety of pop-up windows and tabs that will greet you as you log in, such as market depth, probability calculators, charts buzzing with visualisation tools and indicators, and so forth. All of this can be a lot to process for a novice trader. Meanwhile, its forex counterpart has a more user-friendly platform, with a One-Click Trade feature for faster trade execution.
Access to stocks is limited, with markets opening at 9:30 AM on Monday and closing at 4:00 PM same day. This schedule repeats until Friday. The forex, market, on the other hand, provides longer trading hours, open 24/5, opening at Sunday 5:00 PM EST and closing at Friday 5:00 PM EST. Around the globe, an exchange opens and closes, giving forex traders access to liquidity any time of the day. This can be a favourable feature for people who are working day jobs and can only trade during early morning hours or late nights or outside market hours. In the case of ECN trading where there is no dealing desk and trade is done electronically, trading can be done 24 hours a day, 7 days a week.
Similarities Between Stock and Forex
Cost of Trading
The cost of stock trading relative to forex trading in Australia depends primarily on the broker of their choosing. The majority of stockbrokers implement a per-trip fee of less than $10 for standard accounts. Forex brokers usually add their commission on the currency pair’s spread. As a result, the profit or loss of your position is as-is compared to stock trading wherein the bottom-line can be reduced once the closing fees are applied. Regardless of which market you choose to trade, expect fees to be deducted from your account.
The psychological challenge of trading cannot be escaped. Whether you’re trading stocks or currencies, it will always be there. Greed and fear are the main psychological attributes that plague a trader’s performance. To overcome greed and fear, you must proactively train your mindset to accept pre-established rules and execute it with ease. Working on your mindset is half the battle of succeeding in trading. The technical and fundamental analysis only constitutes a smaller piece of the pie.
When you distil it to the pure numbers and algorithms constituting analytical tools used to decide whether an asset is a buy or sell, sure there are differences. But on the surface level, the analytical tools used to trade both markets are homogeneous. They use either or both technical and fundamental analysis, such as historical price data or central bank interest rates.
Which is Better?
This question cannot be objectively answered as trading the financial market success depends not just on external factors like the markets and its major players but also the individual trader and his/her preference and knowledge base and may also depend on whether the trader intends to invest on a short term or long term. Try both financial markets by dividing your available capital into two accounts. Remember, at the end of the day, whichever you decide to trade, the most profitable trader is one who can masterfully manage risk.