Forex vs Stocks: What are the differences?
|Forex vs. stocks: an overview|
|Difference between forex and stocks|
|Correlation between the forex and stock markets|
|Trading stocks and forex|
Currency exchange and stock markets are two different fields of investment. They remain amongst some of the most popular and potentially profitable types of investment you can find anywhere in the world. In this article, we are going to explore the differences between them, and we will also cover the similarities and correlations between the two markets.
We will then try to discover how they compare against each other and see if we can help you decide which one is more advantageous for you.
Forex vs. stocks: an overview
The forex vs. stock market size equates to two different goliath markets. For an idea of just how gigantic they both are, it is estimated that around $5 trillion worth of daily forex transactions are executed. This is over $3.5 billion every minute.
This means huge amounts of liquidity are available if you are trading currency. If you are trading stocks, you can set a sell order, but it will execute at the point of liquidity, and sometimes this isn't the entry point you initially wanted. This isn't an issue when it comes to forex trading due to the staggering amounts that are traded daily.
The US stock market has over $24 trillion of live and tradeable assets. However, it doesn't see the same levels of trade volume as a lot of the larger assets are more likely to be used for mid to long-term investments. That being said, the availability will be there if you wish to buy and sell large stocks.
Difference between forex and stocks
There are key differences to note between foreign exchange trading and stock trading. One of the main things to note is that due to the nature of the international currency exchange markets, forex exchanges are open 24 hours a day. However, when it comes to stocks, they are traded between office business hours.
Stocks are more beneficial if you are looking for a long-term investment. Forex is a better platform due to bigger fluctuation if you're looking to monitor charts meticulously and make quick trades to make portions of profit. This type of strategy is more effective in the short term. Forex also provides the opportunity to trade 24 hours a day, which might be an advantage in the digital age.
When it comes to investing in stock, there are hundreds of possible opportunities. However, the risk is measured on a scale; some companies are considered stronger investments than others. For instance, if you were looking to invest in a larger company, they are generally less susceptible to market volatility. However, getting in as early as possible is where you ideally want to find your entry point.
Apple is considered a watertight investment as they are one of the world's biggest companies. However, the price isn't going to go up by 300% in the space of a month or so. If you'd have bought Apple stock 25 years ago, this is the type of long-term investment that you'd want to have in your portfolio.
These companies are blue-chip stocks and should take up a portion of any worthwhile portfolio. There are more variables at play with forex, whereas stock tends to work steadily. Stocks also provide other profit streams that forex doesn't, such as dividends.
Ideally, these two shouldn't be seen as one investment or the other. It would be best if you had a balanced portfolio containing many different investments to ensure you are shielded from one portion of the market taking a hit.
Correlation between the forex and stock markets
The difference between forex vs. stock markets is evident. It isn't hard to distinguish why a Euro and US Dollar trade differs from investing in Tesla. However, this doesn't mean that the two aren't similar in some ways either.
As discussed in the last section, large investment banks will have significant reserves of both forex and stocks. They will also have other investments that they hold long-term, usually commodities such as gold which acts as an inflation hedge. This is an example of a balanced portfolio.
Significant amounts of both ensure that a portfolio is diverse enough to absorb any serious market hits or volatility. Therefore, both share a correlation in the sanctuary they can provide for institutional investors when detailed on a balance sheet.
You can also set automatic buy and sell orders in both markets to remove the possibility of emotional trading clouding your judgment.
Despite forex offering a lot more liquidity than some stocks, they are similar to blue chip stocks as they don't struggle for liquidity and often have buyers willing to scoop up shares when serious fluctuations occur. In this instance, they both share a similar trait.
Trading stocks and forex
The markets don't stay still. This is true for any generation of trading. Whether it's the .com bubble or cryptocurrency, there have been huge opportunities over the past few decades.
Investors who have entered the market within the past decade have entered at a time when trading stocks and forex have never been as accessible to the everyman thanks to innovations in computing.
The tools that allow anyone to enter the market have been big innovations over the past few years.
If you look at mobile trading apps such as amana, you can't only buy and sell stocks, but it's an app that covers many different trading options. The argument of forex vs. stock markets becomes fairly redundant when you can trade both with such ease.
If you prefer the flexibility of markets and like to trade outside of office hours, you can make better use of trading currency. However, if you prefer stability and setting yourself a mid to long-term investment as a goal, stocks are more likely to fit your investment strategy and psychology.
Despite their key differences, forex and stocks are both big players in the trading world. They are behemoths of the field and will likely continue to be as long as investments focus on large global currencies and huge corporations.