The forex market and the global stock exchange are two of the biggest financial entities anywhere in the world, the former alone worth in excess of $2 quadrillion.However, both markets are inherently different, particularly in terms of their mechanics, investment vehicles and the precise asset classes available.
But which one is right for you? Here are some of the most striking differences and advantages associated with each market.
Forex and Stock Market Trading – An Introduction
The forex market is the world’s largest financial space, with an estimated $6.6 trillion traded each day in the foreign exchange.
Here, international currencies are traded in pairs as derivative assets, which enables individuals to invest without assuming ownership of the underlying financial instruments.
This also enables traders to profit even as assets and the market depreciate in value, while currency is renowned as one of the most liquid asset classes around.
Conversely, stocks represent shares in individual companies, and can include small, medium and large-cap options depending on the size of the overarching business. You can also trade blue-chip shares on the stock market, with this offering a relatively secure store of wealth that typically pays out regular and reliable dividends over time.
Stocks of this nature are generally able to operate profitably during challenging economic conditions, while they’re also inherently less volatile than currencies and typically offer reduced leverage to traders.
Of course, it’s also possible to trade stocks and indices through contracts for difference (CDFs) and exchange traded funds (ETFs). These vehicles allow you to invest without owning the underlying asset, creating an added degree of flexibility for traders across the board.
What are the Pros and Cons of Stocks and Forex?
One of the main advantages of trading forex is leverage, which refers to the amount that can be borrowed in relation to your initial deposit sum.
The forex market offers leverage of up to 50:1 through platforms such as the MetaTrader 4, enabling investors to open up trading positions that are considerably larger than you would otherwise be able to afford.
Conversely, the stock market only offers leverage of 2:1, making it less appealing from a potential profit perspective.
However, you can also lose considerably more than you can afford with inflated leverage, so this is something to keep in mind when trading volatile assets such as currency pairs.
The forex market is certainly more volatile than the global stock exchange, making it considerably more appealing amongst risk-hungry investors.
For traders who are a little more cautious or risk-averse, however, stocks (and particularly blue-chip) shares may be a little more inviting.