If you’re considering opening a position in the financial market, you may not be certain of where to begin. Investing your capital can seem daunting, but with sufficient research, a developed plan and a good online trading platform, you could make your money do more for you.
Two of the most popular markets to trade in are the foreign exchange (forex) and stock market, and they can be a great place to start when developing your investment portfolio. Read on, as we compare and explain the difference between these highly active markets.
What is forex?
Forex is one of the most actively traded assets in the world and nearly $6.6 trillion worth of transactions take place on the market each day. The forex market deals with the exchange of national currencies and these are traded in pairs. This is so that the currencies can be directly compared against one another to determine their individual value.
Each currency pair consists of a base currency and a counter or quote currency. In the case of one of the most commonly traded pairs — the Euro against the US dollar (EUR/USD) — the euro acts as the base currency, meaning that its value is based upon the dollar, since the dollar is the counter currency.
Forex trades take place over-the-counter (OTC) via electronic trading platforms, and it does not have a central market place or physical exchange, like other financial instruments. This enables you to react effectively to short-terms fluctuations in the market and maximise the chances of making a profit.
You can invest in forex on a contract for difference (CFD) platform like Plus500 forex trading, for example. Here, you’ll be able to invest in the forex market without owning the underlying asset. Instead, you’ll own the contract that you make with the investment broker and will exchange on the value of that contract, once the agreement has ended.
What are stocks?
Stocks are equities, meaning that when you make a purchase on the stock market, you are buying a share of the company you’re investing in. For example, if you were to buy Apple (AAPL) stock, you would own a minute portion of the tech giant.
There are two different types of stock, public and private shares. Public stock is available for all consumers to purchase on the financial market, on the other hand, private stock is only offered to certain investors.
The main way that traders tend to profit from stocks is through capital gains. This is the process of selling your shares for more than you paid for them. Alternatively, you might be able to capitalise on the company’s dividends. Dividends are a portion of the business’ earnings that they distribute among shareholders. These can provide traders with a healthy return over time.
The key differences
When investing in the financial market, it’s important that you know that each market has its own characteristics and as a result, you’ll need to adjust your strategy to that specific asset. Here are some of the key differences between forex and stocks:
- Trading hours
When trading in the financial market, there are specific trading hours in which you can open or close a position. Being one of the most active markets, forex is available to trade 24 hours per day, 5 days per week, catering for the different time zones.
Trading stocks on the other hand, is far more limited. Depending on where you’re trading from, your national stock exchange will have a daily trading timetable. The London Stock Exchange (LSE), for example, operates between 8am and 4.30pm.
- Volatility
Volatility is central to forex trading. The majority of forex trading strategies are tailored to take advantage of short-term price changes caused by volatile market conditions. These strategies aim to open and close a position quickly, with the hope of profiting from brief dips or spikes in price.
The stock market on the other hand, is far less volatile and tends to lend itself to traders with a long-term investment strategy. Well-established ‘blue chip’ stocks like Amazon (AMZN), Microsoft (MSFT) and Coca-Cola (KO) provide investors with stability, since they rarely experience significant price changes.
- The scale of the markets
As we previously mentioned, it’s estimated that the forex market trades nearly $6.6 trillion per day and the majority of this capital is concentrated to the major currency pairs. On the other hand, the stock market sees around $200 billion worth of trades each day. Of course, this has much to do with the differing trading hours that the two markets operate under.
If you’re looking to become a successful trader in the financial market, then it’s important that you diversify your investment portfolio. By opening positions in different markets, like stocks and forex, for example, you’ll be able to lessen the risk of making losses, reducing your exposure in one market by spreading out your capital.
