While foreign exchange trading- commonly known as Forex Trading and Stock Trading have their similarities as they both profit from the constantly shifting prices, that is where their superficial similarities end. As a trader, what is of utmost importance to you is realizing the differences between both these forms of trading and finding out which one would be more conducive to the services you provide. You could also factor in your own goals regarding your business. Well, if you want to know what constitutes forex and stock trading- you have come to the right place. Read on.
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Stock Trading and Forex Trading
The very basic difference between forex and stock trading is that forex trading is the very involvement of both purchasing and selling currency that has been minted in two varied countries. On the other hand, Stock Trading depends on the purchase and sales of multiples shares in a single company. This does imply that both these types of trading have their own pros and cons, and will be useful in different situations if the trader has the acumen to see it through. If you want to use stock trading, you should make sure that markets are ascending, for if the liquidation were low it would make it nigh on impossible to sell short in plummeting markets. But if you want to bring everything under an umbrella Forex might be your ticket- for you can use it almost on every form of market. It involves the purchase and sale simultaneously which every trade accounts for.
Similarities between Forex and Stocks
Despite forex and stock trading having some marked differences, it would be unwise to think they don’t have any similarities in between. One of the biggest similarities that these two forms of trading share is that they take advantage when there is a short-term shift in price, helping them generate profit. Not to mention this also factors in a risk of the currency one is holding to simply fall. In trading terms, HANNA- where the price will plummet during purchase and not during the sale. Also, most forex traders believe in having a strong technical analysis of the markets just like stock trading in order to calculate the probable shift in prices, and information on trading behavior. And finally, both these forms of trading require quite a deep knowledge of how markets operate to consistently churn out a profit.
Differences between Forex and Stocks
Regulation
The main difference between forex and stock trading is that they have always been regulated through different government organizations. The SEC looks after all stock options and equities trading, while the Commodities Futures Trading Commission – a government agency – and the non-profit National Futures Association oversee Forex tradings. The main objective of these regulators is to ensure that the individual traders aren’t mooched off by fraudulent brokers in various countries which have fewer regulations enforced upon them.
Leverage
Leverage is a big part of forex trading and constitutes a humongous part of it- something that stock trading lacks in all purposes. This feature makes forex trading both a risky, yet rewarding endeavor. As far as the United States of America goes, forex traders have a 50:1 leverage which implies that they have to hold onto just 2% of the value of the foreign currency to get a deal. This is completely in contrast with the stock trading, where traders need to have at least 50% of the trade as cash in their own accounts.
Trading Hours
Stock trading occurs at a very strict timeframe and only from Monday to Friday. On the other hand, forex trading occurs every single hour of the day, every day of the year. This is usually in part due to the global communications network that is needed for forex trading doesn’t involve a physical space- hence no time constraints. Also, foreign currency is in demand every single hour of the day, whereas stocks aren’t of much value after business hours especially in the country the company resides in.
Volatility
Although stock markets are considered to be more volatile due to the ever-fluctuating prices of stocks, forex trading have also had periods of increasing volatility, when the global prices of foreign currency went under a process.
Market Size
This isn’t exactly a very surprising question, for stock trading happens mostly on a national basis, therefore the market is huge inside the country. The purchase and sale of stocks inside the country make it a profitable venture. But forex trading happens on a global scale- and hence the entire world is a market. There is no competition.
Liquidity
Stock trading has a much more inconsistent liquidity rate due to the various forms of stock options available. Some of them are liquid enough, while others aren’t- making it a fluctuating one. Forex trading on the other hand is pretty consistent in liquidity. Even though foreign currencies are vast but diverse, they are essentially infinite when it comes to trading.
Catalysts
Forex Trading has its prices shift to and fro through global news and events. When it comes to stock trading, it is most influenced by news surrounding the company which either purchases or sells the shares. Although there is a possibility that both forms of trading might incur some changes if there is a massive shift in the economic conditions in the host country.
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Which is Better for You Between Forex and Stock Trading?
It all comes down to your ideas as a trader and how much risks you are willing to take. Forex trading can be lucrative due to the leverage involved, but it can also get heavily risky at times. If you are looking for safe options, stock trading is a simple endeavor but not as profitable. If you are looking to earn a large amount of money at a very fast rate, forex trading might be your thing. But remember, since it occurs every single hour of the year, you might have to be awake at 4 am in the morning to look up a trade. Both forex and stock models of trading have their advantages and disadvantages- it needs to be seen which one fits your model.
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