Stocks vs. Forex: Which Market is Best?
When it comes to becoming a trader, the two most common markets to immerse yourself in are stocks and forex. There are different advantages to both, and it is entirely personal which one is better for you. A lot of people opt for forex trading due to the enhanced leverage capabilities compared to stocks. However, the stock market has much better regulatory safeguards, making it much more appealing to some than forex. Here is a little more about these two markets and the facts you should know.
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What is the Stock Market?
So what are stocks? ‘Investing in stocks or shares of a company is like owning a part of the enterprise. Shareholders of a company gain a greater percentage of ownership as they purchase additional shares. In addition, the payment of dividends to stockholders is usually distributed annually or quarterly.
Dividends are sums of money you receive based on how much ownership you own. It is common for investors to hold positions on the stock market for a number of days, even months. Different stocks from different companies are traded on different exchanges in the stock market. This network of exchanges allows you to buy and sell shares (much like buying and selling currencies).
On weekdays, the stock market operates for eight hours, from 9:30 am to 4 pm Eastern time, unlike the foreign exchange market, which is open 24 hours a day. Compared to the $5 trillion traded in the forex market each day, the daily volume traded in the stock market is only $200 billion. A trader may want to consider forex or stocks if they wish to participate in the billions of dollars traded every day.
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What is the Forex Market?
The forex market, also known as the foreign exchange market, is a marketplace for buying, selling, and exchanging currencies. Individual traders, banks, and travelers using local currency all participate in this market. Currency exchange rates determine markets’ prices for buying and selling currencies since they represent one currency’s value in terms of another currency – how many units of one currency you must buy for one unit of another.
A great example is if the euro is worth 1.21 US dollars, it means buying one euro will cost $1.21. A wide variety of individuals and corporations conduct million-plus trades daily on the currency market – on average, up to five trillion U.S. dollars every day. However, it is important to note that this ‘price’ is never fixed and constantly changes. Because exchange rates are determined by supply and demand, if the demand is high, the price will be high, and vice versa.
Changes in exchange rates can be caused by world events, news, and other factors, though they are typically small and infrequent on a daily basis. The majority of forex traders hold their positions for a short period of time or a few days at most.
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Stocks vs. Forex: What is the Difference?
Leverage Limits – With stock trading, the margin account has a maximum leverage of 2. This being said, a day trader that opens and closes their account during one day and keeps an account balance over $25,000 can trade with a 4:1 leverage limit. Some other qualifying factors come into play when given these margins, and not every investor will be approved, which is why before trading stock, it is essential to research leverage in the market.
When it comes to forex trading, leverage is very different. You can open an account with no prior requirements. The exact limit will differ depending on the brokerage, but most traders can expect access to a 50:1 leverage.
Trade Pairing – Currencies are always traded in pairs in currency trading. These pairs change due to the economic growth of a country, so it is essential that you are aware of both countries when trading this way. Forex is historically more sensitive to global political or economic crises, but this does not mean the stock market is completely immune to the effects. This being said, stocks are generally less sensitive to these issues.
Liquidity – With trading stocks, you are buying shares in a company, which means you own a percentage of the business. These prices will change depending on the market supply and demand. Trading with forex is entirely different. Although global and political happenings can cause fluctuations in price, there are always alternate currencies to choose from. Buying 10,000 stocks could affect the price of a share, which is particularly noticeable with smaller businesses compared to giants such as Amazon, Facebook, Tesla, or Apple.
The contrast is that trades in forex of hundreds of millions of dollars will have little to no impact on the currency market price. There is always too much supply for any single transaction to have enough of an alteration to price.
