Stock and forex trading do appear quite similar to prospective traders. You trade both on exchanges, usually, and you don’t deal with physical assets. On a surface level, it is understandable to have that impression. However, if you start scratching the surface, you will see that there are plenty of differences to examine. So, in this article, we will compare both the differences and the similarities between these two industries. Comparing and contrasting these two trading markets will make it easier for you to decide which will suit you best. Therefore, you will be able to figure out your future plans as a trader.
The similarities between stock and forex trading
First of all, what are the similarities you are likely to see between the two? Well the most obvious, and slightly redundant, similarity is that they are both financial markets. You trade assets, hoping to make a profit between your buying and selling price as it changes according to market demands. Therefore, the general idea is to buy low and sell high. You tend to trade on online platforms for both, especially as you are not trading in physical goods. Overall then, they are both vehicles for financial gain through financial markets. They both are similar in broad strokes. However, the differences appear in the details.
Assets in stock and forex trading
The first difference you shall notice is the assets being traded, as it is in the names. With stocks, you are trading company stock. The purpose of these stocks is to allow companies to raise investment funds. Investors can then trade them to make a profit, once the company becomes more profitable. The stock also gives investors dividends, so they can have a passive, constant income, without selling the stock.
Forex markets trade currencies. The value of currencies is controlled by economic movements. It is more reliant on world and nationwide events which may shape the overall economy.
However, the forex market is a trade market between the value of two different currencies. There is no constant measure for all currencies, which is why investors compare them against other currencies. This is why forex trading may be a tad trickier in some aspects, You need to keep in mind the relative value of two economies, and how one may affect another. You thus need to keep in mind if one country makes any moves to affect the other.
How accessible are stock and forex trading?
Forex trading is generally far more accessible than stock trading. This means that the market is far larger. The reason for this is that all you need to trade in the forex market is money. You simply trade from one currency to another, and that is it. There are plenty of people available to trade, as a result, because someone is bound to want to trade your currency. Stock market trades, however, solely occur in exchanges at specific periods of time, with willing traders. Whatever after-hours trading you find will not be worth your time. You also have to learn separately about any industry you invest in, to understand how your investment may do.
The regulation of both markets
Both markets have some sense of regulation, but there is still a large gap. Generally, stock markets have far more regulation than forex ones. This is partly because of what we said earlier. Forex markets are far more accessible, and anyone can trade in them. This makes it more unruly, as people are unwilling to regulate such an enormous sector. There are some government bodies that do supervision over the market, but there is only so much they can achieve. There is, therefore, far more flexibility here.
Stock markets are under far more regulations from central bodies. Malpractice in this industry could result in really devastating consequences, so it is more necessary here. People could possibly affect companies in a very damaging way.
Short selling on stock and forex markets
The forex market allows you to short sell your assets far more freely. In case you do not know, short selling is selling an asset at a high price, the start of a slump, and buying it when it is low. You are essentially betting against it. In forex markets, the decline of a currency could also just be the incline of another. Also, the performance of economies is mostly out of your hands.
In the stock market, the decline of a stock’s value indicates a company performs poorly. This may have a more direct effect on the performance of a company than in the forex market. Stocks also have far more room for growth than currencies, so you could lose a lot of money if things go wrong.
To be clear though, you can short against a stock, but people look down on it. There are restrictions in place and people will advise against it, generally.