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When considering the objectives with which traders approach trading and their end goal in trading, a lot of traders would say that profitability, whether short-, medium- or long-term is what they are attempting to accomplish.
Traders have various options when it comes to the markets in which they they can trade and often comparisons are done to find out which market would be best to trade in.
Despite the fact that both Forex and Stock markets are interconnected, there are substantial differences between them.
Before beginner traders can start trading in either of these markets, it is imperative that the trader first evaluates the trading style which will serve them better in addition to knowing the differences between the Forex and Stock markets.
Once the trader is familiar with their style of trading and what their trading objectives and needs are, the trader can look at key factors involved in trading. and seeing how Forex Trading differs from Stock trading.
As soon as the trader has gained more insight on the differences, the trader can decide on which market would suit their needs more efficiently.
Forex vs Stocks and trading factors involved
The Forex market is the largest financial market in the world with the daily trade value at approximately $5 trillion a day and the stock market reaching only around $200 billion a day.
There is an astronomically high volume of participants in the Forex Market and due to this high volume, traders have orders executed faster and easier with the added benefit that the prices are closer to what they desire.
As soon as there are higher volumes in market, it results in higher liquidity which results in tighter spreads along with lower costs on transactions.
The spreads and transaction costs involved with Forex are significantly lower than that of Stocks due to the high volume and the liquidity of the Forex market.
24 Hours a Day, 5 Days a Week
The Forex market is open all day and almost every day, with the exception that there is a weekend gap. Forex is not transacted over a traditional exchange, but through an OTC and Forex can be traded all over the world despite time zones and trading sessions.
Stocks, however, are subjected to stock exchange hours and even though NYSE and NASDAQ have extended some trading hours, traders may face low trading volumes as well as lower liquidity during these times.
When looking at the trading costs involved of trading Forex, traders will see that Forex Brokers often may not charge commissions on currencies traded but instead make a margin on the spreads.
Stockbrokers, on the other hand will, in most cases, be subjected to paying both the spread and commission fees to the broker.
Narrow and wide field of focus
There are virtually thousands of stocks that traders can choose from and it may be overwhelming in addition to requiring extensive research.
Forex pairs can be divided into major, minor, and exotic pairs with major pairs being the most traded amongst them all. Keeping track of currencies can easily done by utilizing an economic calendar.
This is an exceptionally useful tool in trading and can be used as a way of boosting the account of the trader, allowing them to open larger orders despite their initial deposit and funds available in their trading account.
Brokers tend to offer a higher level of leverage on Forex than what is offered on stocks with Forex leverage ranging from 1:30 and even up to 1:1000, depending on the broker and their regulation and authorizing body.
Stocks however provide traders with a leverage of 1:2 which may go up to 1:50 depending on the stockbroker.
Influences on prices
Forex prices are affected by global news and these prices are subjected to the political and economic situations that emerge in other countries. It is imperative that traders keep track with developments in macroeconomic issues such as GDP, political prospects, and more.
The prices of stocks are also subjected to movements in these macroeconomic conditions, but on a much larger scale. News and earnings reports pertaining to the underlying stock of the company or the company sector result in price changes and movements.
Due to stocks being traded on major exchanges, there are extremely strict regulations, and this may impose unwelcome limits, but it protects the trader to a certain degree, and it remains one of the most important factors of having chosen a regulated broker.
Forex trading is a lot less regulated than the former, but it still remains imperative to trade using a well regulated broker to avoid great losses which can be incurred and risking fund safety to stand a chance of increased gains, is not worth the risk.
How do beginner traders choose which market to trade in?
Taking the differences and limitations of each market into account, it comes down to preference and trading needs along with objective, and each trader is going to differ in all of those criteria.
Deciding in which market to trade, traders will have to have a thorough understanding of the characteristics of each market and the fundamental differences between them to be able to evaluate which market will better suit their needs.
Traders will need enough knowledge of each market, their goals, trading style and their tolerance of risk in addition to their willingness and the extent to which they can be exposed to varying levels of risk.
A lot of traders choose to trade in both the Forex and the Stock market, while others only choose one. Each market has great investment opportunities, each with perks and risks.
Conclusion and Writer’s Opinion
There is no financial market that does not offer great opportunities that are accompanied by some level of risk and it depends on the beginner trader and their evaluation on what they want to attain, whether it is sustainable and what they are willing to risk.
By drawing up a trading plan that details what the trader’s trading needs are, beginner traders can then start exploring the best options which are according to their trading needs.
It is imperative that traders conduct enough research on financial markets along with the different assets that can be traded to obtain a clearer understanding of how it will suit their short-, medium- and long-term needs.