The world’s financial markets are dominated by forex and equities, with the former seeing an estimated $6.6 trillion traded globally every single day.
Conversely, the global stock market boasts a cumulative capitalisation of $70.75 trillion, with this having risen exponentially from just $2.5 trillion back in 1980.
Clearly, both of these markets and asset classes offer huge potential to traders, while they continue to be defined by several similarities and a number of unique (and important) differences that set them apart.
We’ll compare Stock Trading and Forex Trading below while asking how their differences should impact on your choice of activity as a trader.
What is Stock Trading and Forex Trading?
As we’ve already touched on, the forex market is the world’s largest financial sector, both in terms of daily trading volumes and the number of participants spread across the globe.
Investors trade currencies as a derivative asset through this market, which means that they don’t have to assume ownership of the underlying financial instrument and can speculate to achieve a profit even in a depreciating marketplace.
Because of this, the forex market is incredibly liquid, with the world’s major fiat currencies capable of being bought and sold freely in variable market conditions. This market is highly leveraged too, so traders can open positions that are considerably larger and more lucrative than the initial deposit size.
When dealing with traditional and blue-chip stocks, traders are encouraged to invest in well-established and potentially high growth equities. This may be small, mid or large cap opportunities, depending on their current financial performance and opportunity for further growth in the future.
Stocks are generally considered to be less volatile than currencies, while the most common trading vehicles also enable you to assume ownership of the underlying company shares. This arguably affords you a secure store of wealth during austere economic times, and in this respect traditional stocks can serve the same purpose as gold.
However, the evolution of the stock market has been pronounced in recent times, with vehicles such as Exchange Traded Funds (ETFs) offering instant access to a broader and more diverse range of equities within a single fund.
Similarly, you can trade a diverse selection of carefully selected stocks by investing in targeted indices, minimising risk and potentially optimising your returns in the process.
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Which Option is Right for You?
Fundamentally, forex trading has appealed to traders who are comfortable with taking on risk and prefer to pursue short-term gains, with the market’s innate volatility capable of triggering various price movements during each 24-hour trading session.
Conversely, stock trading is ideal for relatively risk-averse individuals who prefer to assume ownership of a viable asset and chase long-term gains, especially when you target so-called ‘blue-chip’ equities that are capable of delivering reliable (but relatively modest) profits.
Of course, there’s something of a trade-off when investing in less volatile assets such as blue-chip stocks, and the available returns tend to be lower than those associated with day trading in the forex market.
It can also be argued that the forex market offers a number of distinct natural advantages over stocks, particularly in the digital age.
For example, while the 24-hour nature of the global forex market was once a significant barrier to entry for part-time traders, the emergence of tools such as the MetaTrader 4 has allowed for real-time market access from anywhere in the world.
In addition to levelling the playing field for traders, this has also made it possible for individuals to influence trades and execute orders using a handy mobile or desktop device at any time of the day.
There’s also a strong correlation between currency values and those associated with commodities such as oil and gold, so trading on the forex market can make it easy to build a diverse and lucrative portfolio over time.
