In order to decide which market is preferable to trade, traders frequently compare stocks and forex. The foreign exchange and stock markets are very different, even though they are linked. The forex market stands out from other markets due to its distinct features, which also make it considerably more appealing to trade in the perspective of many.
Knowing which trading style best fits you is typically the deciding factor when deciding whether to trade stocks or FX. However, being aware of the variations and parallels between the stock and forex markets also helps traders to make well-informed choices about their trades depending on variables like volume, liquidity, and market conditions.
What is the forex market?
The forex or ‘foreign exchange market is a marketplace in which currencies can be bought, sold, and exchanged. The participants in this market range from banks, individual retail traders, and even travelers in need of local currency.
The price at which the market participants buy or sell currencies is determined by their exchange rate, which is the value of one currency in terms of another – how much of one currency you need to buy one unit of another currency. For example, the Euro is worth 1.21 U.S. Dollars, meaning it takes $1.21 to buy one Euro.
On a daily basis, trades are performed millions of times by many different individuals and corporations – on average, the forex market trades upwards of 5 trillion U.S. Dollars per day! This ‘price’ however is not fixed and always changes. This is because exchange rates are driven based on supply and demand – the higher the demand, the higher the price, and vice versa.
Exchange rates can change depending on things such as world events, news as well as other (sometimes even unknown) factors, though changes on a daily basis are generally very small. Most forex traders hold their positions for a few hours or days.
What is the stock market?
What exactly is a ‘stock?’ If you purchase a stock or ‘share’ of a company, you are essentially buying a piece of it. The more shares in a company you purchase, the greater your percentage of ownership. Most companies also pay out dividends to stockholders on an annual or quarterly basis.
A dividend is a sum of money – the greater your ownership, the more money you would receive. Stock market traders generally hold their positions for several days – all the way up to months.
The stock market is a collection of exchanges that trade various stocks in different companies. Shares can be bought and sold to others via this network of exchanges (similarly to buying and selling currencies).
Unlike the foreign exchange market, which operates 24 hours a day every weekday, the stock market is open for 8 hours, 9:30 a.m. to 4 p.m. Eastern time (on weekdays).
The volume traded per day is $200 billion, considerably less than the $5 trillion traded in the forex market. If you would like a piece of the billions (and trillions) of Dollars traded per day, you may consider learning to trade stocks or forex.
The main reason why anyone would be interested in the stock or forex market is most likely to make money, or to hedge trade. But how exactly does one make money trading in one of the mentioned markets?
The answer to this question is very simple for both stock and forex trading: buy low, sell high. However, the difficult and more complex part is actually finding the ‘highs’ and ‘lows.’
There are two main ways to do this: technical and fundamental analysis. There is no clear-cut answer about which ideology is better, and thus the debate between technical and fundamental analysis is highly dependent on the individual and their personality.
Both technical and fundamental analyses aim to predict future price movements based on the principles of supply and demand.
- Technical Analysis
Technical analysis is the use of past data (such as price or volume) with the objective of predicting future price movements. In short, technical analysts base their trading style on the saying “History tends to repeat itself.”
By examining past data, traders are sometimes able to identify highs and lows, so that they can buy and sell at the best times to make the most amount of profit.
Technical analysis is applicable to both the stock and forex market (as well as other markets), however, it is primarily used by forex traders. Those who are interested in mathematics, data science, and pattern recognition may also find interest in technical analysis.
- Fundamental Analysis
On the other hand, you also have fundamental analysis. This is generally performed on businesses and takes a holistic approach to determining the value of security. For example, an investor (or trader) would examine the financial performance of a company, calculating values such as net profit, equity ratios et cetera.
They would also take into account the company itself and its market – are people interested in this company? How many people will benefit from its actions?
Macro and microeconomic factors are also taken into consideration (as well as many other factors), and used to determine a company’s potential or future value. Those who are interested in business and long-term investors may find that the stock market is more suitable for them.
Differences Between Forex and Stocks
The table below summarizes a few key differences between the forex market and the stock market:
| FOREX MARKET | STOCK MARKET |
|---|---|
| Large volume- Around $5 Trillion per day | Less volume – Roughly $200 billion per day |
| Highly Liquid | Less liquid |
| 24 Hour Markets | 8 Hour Markets |
| Minimal or no commissions | Commissions |
| Narrow Focus | Wide Focus |
Let’s take a more in-depth look into how exactly the forex market compares with equities (stocks).
Volume
One of the biggest differences between forex and stocks is the sheer size of the forex market. Forex is estimated to trade around $5 trillion a day, with most trading concentrated on a few major pairs like the EUR/USD, USD/JPY, GBP/USD and AUD/USD. The forex market volume dwarfs the dollar volume of all the world’s stock markets combined, which average roughly $200 billion per day.
Read Also: How Trading Futures Work
Having such a large trading volume can bring many advantages to traders. High volume means traders can typically get their orders executed more easily and closer to the prices they want. While all markets are prone to gaps, having more liquidity at each pricing point better equips traders to enter and exit the market.
Liquidity
A market that trades in high volume generally has high liquidity. Liquidity leads to tighter spreads and lower transaction costs. Forex major pairs typically have extremely low spreads and transactions costs when compared to stocks and this is one of the major advantages of trading the forex market versus trading the stock market.
24 Hour Markets
Forex is an over-the-counter market meaning that it is not transacted over a traditional exchange. Trading is facilitated through the interbank market. This means that trading can go on all around the world during different countries’ business hours and trading sessions. Therefore, the forex trader has access to trading virtually 24 hours a day, 5 days a week. Major stock indices, on the other hand, trade at different times and are affected by different variables. Visit the Major Indices page to find out more about trading these including information on trading hours.
Minimal or no commission
Most forex brokers charge no commission, instead, they make their margin on the spread – which is the difference between the buy price and the selling price. When trading equities (stocks) or a futures contract, or a major index like the S&P 500, often traders must pay the spread along with a commission to a broker.
Forex spreads are quite transparent compared to the costs of trading other contracts. Below you will see the spread of the EUR/USD highlighted inside of the executable dealing rates. The spread can be used to calculate the cost for your position size upfront prior to execution.
Narrow focus vs wide focus
There are eight major currencies traders can focus on, while in the stock universe, there are thousands. With only eight economies to focus on and since forex is traded in pairs, traders will look for diverging and converging trends between the currencies to match up a forex pair to trade. Eight currencies are easier to keep an eye on than thousands of stocks.
The variables that affect the major currencies can be easily monitored using an economic calendar.
Which Type of Trading is Most Profitable?
It may be too difficult to come up with one type of trading that is more profitable than others, however, Day trading seems to be the choice of active traders due to its profitability. The reason why it is difficult to point to the most lucrative one is that it depends mostly on the type of trader, and on which strategy the trader chooses to use.
Individual traders can make several trades a day since it isn’t so hard to enter and exit a few trades daily. On the other hand, big investors would prefer long-term opportunities.
One is certain, becoming a day trader is a decision that shouldn’t be made in a hurry. You should be patient and take your time examining all the challenges, to learn then since day trading requires very attentive planning. Only in that respect, you’ll be able to profit from your lifetime capital in only less than a day. This is possible since day trading is one of the most profitable types of trading out there.
But what exactly is Day trading? Well, day trading means the trader is opening and closing the position during one day of trading. When a trader opens a trade at 7 PM and closes it before 11 PM, this is known as day trading. Some traders perform this procedure based on the situation and opportunities. On the other hand, many traders do not take advantage of day trading.
Of course, a day trader is very vigilant and never just chooses a stock no matter which one. Day traders always calculate the reasons to trade a certain stock. And as the reasons vary, traders have various strategies and criteria.
Since there are thousands of stocks available in the financial market to choose from, What makes a day trader pick a stock is based on which ones are breaking out of patterns. Some are seeking the most volatile stock or the stocks that break out of resistance levels. Also, some traders have their favorite stock or two and trade them daily for months or years. If you are familiar with a certain stock very well, you’ll need less research on it. Since you already have the stock of your choice, you don’t need to monitor any further for new stocks and volatility or breakouts.
Another thing that day traders look at is the stock’s volume. For a day trader, a stock volume is crucial to enter and exit trades. When the volume of the stock is high, then it is much easier to enter and exit the position and to do without slippage or with very little.
It takes place when a trader gets a different price than anticipated, no matter if such a trader is on an entry or exit from a trade. Slippage happens when the market order or your stop-loss points move somewhere between the time of your entry and the time of the execution. This is noticeable during times of higher volatility when orders are larger than the regular amount of shares on the offer or bid.
However, many traders will trade stocks on a daily volume of a few million, while some will even trade over 80 million. That is a large number and it is difficult to manage that. So day traders tend to narrow down the number of stocks by using a stock screener. If they still have too many stocks to monitor, the traders usually reduce it to stocks with a volume of 3 to 4 million on a daily average.
The most crucial factor to consider when day trading is managing the risks. First, trade only with an amount you can afford to lose. The most ideal approach is to start with a small amount and keep solid control over losses until you get some experience. Don’t enter the day trading game thinking you can immediately quit your job. Day trading can be seductive. However, you need to test your strategy when the markets get bumpy, for instance, during the recession. If you are profitable, you can easily move to day trading.
At the end of the day, day trading is about taking advantage of small price changes. It can be a highly profitable game if it is played carefully. For new and inexperienced traders who do not have a solid trading strategy, day trading can be a risky game. So many principles must be respected to become a day trader.
What is the Fastest Way to Make Money Trading?
The are numerous markets where traders can participate with other buyers and sellers to make money. You’ve probably heard about the stock market, the option market, the forex market, the crypto market, the futures market, or the commodities market. Each market offers various financial instruments traders can buy and sell to profit from a change in price.
Stock traders are individuals or groups that make money off the rise or fall from a company’s stock price through buying and selling. The amount of money a stock trader makes is determined by a) the size of their position (in shares) and b) the dollar value the stock share prices move in their favor
Some basic ways a stock trader makes money:
Buy Low, Sell High
This is a method through which stock traders aim to buy a stock when it’s cheap and sell it off at a higher price in the future.
Imagine it’s 1998 and you think Amazon could be worth much more than it currently is in a couple decades. You decide to buy $5000 worth of Amazon shares at $5 per share which would be 1000 shares. Two decades later, you return to your trade and find that the stock price of Amazon is now over $2500 per share. You own 1000 shares of Amazon, and at $2500 per share, your initial 5K investment is worth $2.5 million dollars.
You happened to buy Amazon when it was ‘low’ and had correctly assumed it would gain in price, thus selling it higher. This is one of the simple ways in which you can buy low and sell high.
Short Selling
Another way to make money through stocks is what we call short selling. This is the opposite of the example below above. Here the goal is to sell high and buy back lower. Let’s imagine it’s 2007 and you’re worried about the housing crisis and how it might affect banks who own a lot of the mortgage back securities that were so rampantly traded.
You found a stock you think is vulnerable to the housing crisis called Bear Stearns. It’s currently priced around $120 per share, and you think it can go lower, so you decide to ‘short sell’ the stock. Now how do you sell a stock you don’t own? Technically you ‘borrow’ the shares from someone who has them, then sell them, then buy them back later for a lower price, thus pocketing the difference.
Since you were pretty prescient and were right about Bear Stearns going lower, over the next several months, the stock went down from $120 per share to $60 per share, and you closed it out for a $60 per share profit.
That is how you short sell a stock.
Dividends
One of the unique ways a stock trader makes money is by buying dividend stocks. Dividend stocks are stocks of companies that pay income to their investors quarterly, or annually via a ‘dividend’ which is a small distribution of cash from the company to the shareholders. This is done as a reward for owning their stock. The dividend a shareholder gets is often a percentage of their investment.
Hence, every time a dividend is given by the company at scheduled dates per year, you can either a) get the dividend proceeds put into your account, or b) have those dividends reinvested into more shares, thus increasing the size of your position.
Traders who often seek dividends are looking for ‘passive’ income as they don’t have to do anything to get the dividend income.
Final Words
- Traders make money through their speculations about the price fluctuations of financial instruments. They then make trades to back their speculations.
- The trading analysis methods are fundamental, technical, sentiment and flow based trading methods. Fundamental traders use news and economic reports to inform their trading decisions. Technical traders use charts containing the historical price movements of the commodity to inform their trades. Sentiment traders are interested in the overall gestalt of what traders think (positively or negatively) about the instruments they are trading to make decisions. Flow based traders look at the overall buying and selling flows to see where the price is most likely to move.
- Traders come in categories, including swing, scalp, day, position and algo traders.
And finally, remember that the financial markets are very volatile and not constant, but dynamic. You could lose all your money invested if you don’t have proper risk management strategies.
