Forex trade is at times confused with the stock market trade. This observation is usually considered due to the few similarities the two aspects share. The only similarity is that both forms of trade rely on constant changes in prices and take advantage of those shifts. This is where the similarities halt.
It is, therefore, better to grasp the differences between the forex markets to the stock market. This analysis will help distinguish whether an individual is considering forex or stock trade concerning their vision and trading criteria.
The fundamentals of forex trade will be discussed after which the differences it has with stock trade will be analyzed.
Forex Trading against Stock Trading
Let’s start with the stock trade. Stock trade entails the purchase and sale of shares linked to corporations or companies. Forex trade involves the simultaneous purchase and sale of currency pairs of two different nations.
From the mentioned definitions imply that the two forms of trade are completely distinguishable and applicable under varied situations. The stock trade is highly preferred when the market is experiencing a rising trend. This is because of the low liquidity in the market proves difficult for short trades in a diminishing market.
Forex trade is however versatile as it can be profitable in any market situation as the liquidity is high. Versatility can also be realized from the fact that the forex trade involves the simultaneous purchase and sale of the currency pair.
Forex Trade and Stock Trade Similarities
Both forms of trade have some common characteristics. They both entail making use of short-term price changes for the profit generation goal. This also entails the risk involved when performing the trades from the two markets.
Traders in both markets majorly depend on technical forms of analysis to get lucrative price shifts, therefore, indicate the market pattern.
Lastly, trading in both platforms needs a powerful foundational grasp of how the markets operate; this involves constant training for a greater profit margin trend.
Forex Trade and Stock Trade Difference
This is a major difference are regulated and enforced by different regulatory bodies in different nations. For example, in the US, the equity and stock options of trade are enforced by the Securities and Exchange body.
The forex trade is however under two organizations namely the National Futures Association and the Commodities Futures Trading Commission. The former is a non-profit independent organization while the latter is a government-run organization.
One of the key aims of these bodies is to shield the traders and investors from deceptive brokers; such brokerage firms are in plenty in countries with fewer restrictions.
The leverage observed in the forex market is exceedingly more than that observed in the stock market. This means that the forex market can either be exceedingly profitable or incur huge losses to the parties involved.
In the US market, the stock market has a 2:1 leverage ratio while the forex market enjoys higher leverage of 50:1. In other nations, the forex leverage can hit a ratio of 200:1.
- Trading Hours
The trade hours in the forex market run for 24 hours every day starting from Sunday evening and stops on Friday evening. The stock trade has a limited period of trade in comparison limited to the business days of the week.
Forex trade does not rely on a centralized point of exchange with an actual locale. This trade occurs in a global network of electronic-based communication devices. Forex trade also enjoys 24-hour trade due to the high demand that exists for currencies around the world.
Stock trade on the other hand, and other securities, don’t have such high demand after the end of a business day. This deems it useless to keep the stock market up yet the demand for it is low.
The forex market is less volatile than the stock market as currencies seem to be more stable in valuation with one another when the economic environment is stable.
However, there exist special scenarios where the forex trade undergoes situations of high volatility; these situations have a probability of coinciding with the volatility in the stock market.
Note: Since market volatility often has no frequent schedule, then it is recommended to test your trading strategy with backtesting software like Forex Tester.
- Market Size
The forex trade has a larger market outreach as international parties are involved in the trade at the same time from different regions. This gives the reason for the 24-hour operation of the forex market. Stock trade, on the other hand, is a smaller market outreach going to a national level.
If you trade Forex by using EA, you can try Forex Cyborg that has a feature to deal with the market size.
Forex has higher liquidity as compared to the stock market. Stocks have lower liquidity for the reason that they are limited in supply as they represent a corporation’s shares.
However finite the currencies may be in the forex market, they have numerous combinations for trading.
Forex trade can now be regarded as a different aspect of stock trade. This comes from aspects such as liquidity, volatility, market size, trade hours, leverage, and regulation.