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Knowledge Crunch

Forex vs Stocks: 10 Differences Beginners Should Know (2021)

Wednesday, June 9, 2021 3:01 PM GMT

Are you considering starting to trade foreign currency or stocks? 

There's a lot to know about both markets - they're different in how they look and feel to an investor, especially when you're just starting out. 

We're going to introduce you to the most relevant differences between these two markets, including: 

  • The way people trade on each market
  • The technicalities of how trading on each market works
  • What you need to know about each before you start trading
  • Risks that need to be taken into account

We'll go through the ten key differences, covering all of these areas. 

Let's get right into it. 

 

9 Differences Between Forex & Stocks

Difference #1: Trading Volume

Difference #2: Market Volatility

Difference #3: Liquidity

Difference #4: Trading Hours

Difference #5: Commissions

Difference #6: Leverage

Difference #7: Knowledge Level

Difference #8: Short Selling

Difference #9: Trading Platforms

Difference #1: Trading Volume

The first big difference in how Forex and stocks are traded is how many transactions happen each day. 

How much money is moved and how many active investors there are, can have a lot of influence on a range of factors that we're going to be touching on as we move through this comparison. 

For now, let's look at the hard numbers for trading volumes in each market. 

Forex Trading

On an average day in 2019, US$6.6 trillion was traded in foreign currency. 

To put that into perspective, it's an increase of 40% over a decade. 

For a little more detail on the types of trades that huge figure comes from - roughly US$1.98 trillion comes from spot trades; that's transactions that are opened and closed on the same day - or day trades. 

In terms of the most traded currencies in the world, the US dollar (USD) is involved in the most, accounting for 88% of all currency deals. 

Photo by Giorgio Trovato on Unsplash

The next most popular currency to be traded is the euro (EUR), which was part of a traded pair 32% of the time in 2019. 

Stock Trading

Stocks see a much lower volume of trade than foreign currency globally. 

According to the World Bank, in 2019 the total amount of stocks traded around the world amounted to US$60.3 trillion - with 261 working days per year that means roughly US$230 billion per day was traded in stocks. 

Which stocks are traded the most each day can tell you something about how popular, or liquid, and therefore how valuable they are and this can change from day to day. 

Time to look at the next differentiator between these markets. 

Difference #2: Market Volatility

How much a market moves up or down over time will tell you how volatile it is. 

When the price in a market changes quickly or dramatically, we say that it's volatile, whereas stable prices mean that a market isn't volatile, or at least is less volatile. 

A volatile market can be riskier - you could easily invest on the wrong side and suffer losses, but there's more potential to make profits too. 

Which market is more volatile out of forex and stocks? 

Forex Trading

Generally, foreign currency markets are more volatile because there is much more money being moved every day, as we've just seen. 

Here's a chart for EURUSD, which is the rate to sell euros and buy US dollars, over the month up to 17th May 2021, with the rate noted at the end of each day. 

Image Source: MarketWatch

When the price for this currency pair, or any other, changes so often, there is the potential for a fast profit - or loss - to be made in one day. 

Stock Trading

In comparison, stock markets see less activity and so are less volatile. 

This chart shows us the New York Stock Exchange (NYSE) composite index, or the overall value of all stock listed on that exchange, for the month up to 17th May 2021. 

Image Source: MarketWatch

 

Again, this shows the closing value of the market each day, and you can see there is much less movement daily over the month than for the chart we looked at for forex. 

Some individual stocks can be more volatile than the overall market, so there can still be money to be made. 

Advanced Micro Devices (AMD) is traded on the NYSE and has had some big price fluctuations over the last month, according to the chart below. 

This means that there is still potential for quick trades to take advantage of the regularly changing price for this, or other stocks, but overall investing in stocks is less volatile than forex. Time for the third difference between these two types of trading. 


Difference #3: Liquidity

Liquidity - or the amount of easily tradable assets like cash and stocks in a market - is another key difference between trading currency and trading shares.

In terms of trading, the liquidity in a market means how quickly and easily a trader can sell their assets without affecting the price in the market. 

In a liquid market, there will be:

  • Significant trading activity
  • Lots of demand and lots of supply in the market
  • Plenty of people willing to buy and sell quickly

To understand how liquid a market is, lots of traders and investors will look at the market spread. 

There are two pieces of information in the spread:

  • The price a trader is willing to buy an asset at, the "bid" price
  • The price a seller is willing to sell their asset at, the "ask" price

When the two prices are really close together, or "tight", a market has high liquidity because lots of people want to trade. 

To put it into perspective, we'll look at liquidity and spread in both the markets we're looking at individually. 

Disclaimer: Brokers will have different ways of calculating the spread and the prices available to their clients. The information we present here is offered in broad, general terms rather than specific to any one broker.

 

Forex Trading

As we've seen already, there is a lot of money moving around in the foreign exchange market between major currency pairs. 

This means there are always traders looking to buy what you're selling, and vice versa. 

As you can see in the screenshot below, taken around 18:15 EST on 18th May 2021, the difference between how much people can buy a major currency and how much people will sell it for is pretty small. 

Having high liquidity means the market should always have a counterparty ready to accept your trade. 

Stock Trading

Since there are comparatively fewer trades happening on stock markets, the price difference between buying and selling your assets is generally higher. 

Looking at the data below, a sample taken at 18:15 EST on 18th May 2021, you can see the difference between the buy and sell prices is generally higher with these high-quality,  blue-chip stocks than with the currency pairs. 

When trading stocks, you'll seldom see any noticeable delays in executing trades, especially with stocks like these shown above, but the forex market does move faster and is therefore said to be more liquid.  

From liquidity and spread, let's move on to the next difference between forex and stocks. 

Difference #4: Trading Hours

The time of day and day of the week that you can make your trades, open and close positions, and potentially make a profit can be really important. 

Not all markets trade at the same time - you can't expect a NASDAQ broker in New York to be awake at 3 in the morning just in case a trader in Tokyo wants to trade stocks in Apple (APPL)!

Here's how the business hours stack up for these two markets. 

Forex Trading

Currency trading takes place nearly all week, with a few hours of downtime over the weekend. 

This is because currency can be traded on any market where there are people ready to buy and sell. 

Trading starts at Sunday, 20:00 GMT, which is when the market in Wellington, New Zealand opens - 08:00 Monday, local time. 

From here, global markets constantly operate and there is always somewhere open to do a deal on your currency pairs. 

That is, until Friday, 22:00 or 21:00 GMT, which is when Chicago stops trading. 

It's 17:00 local time, but they use daylight saving so the last trade can be different by an hour depending on the time of year.  

Stock Trading

Stock markets are based in a city and adhere to local working hours and time zones for their market hours; you can generally only buy stock traded on that market during its opening hours. 

There is early, pre-market trading and after-hours trading, however, these are more risky times to trade because pricing is harder to calculate - liquidity will fluctuate a lot more as traders open and close orders and there is what's called order piling, causing gaps in the price movement. 

Some of the most popular global exchanges and their trading sessions are: 

  • Tokyo opening hours are 09:00 to 15:00 local time
  • Shanghai trades between 09:30 and 15:00 local time
  • Hong Kong markets function from 09:30 to 16:00 locally
  • Bombay's stock exchange operates 09:00 to 16:00 local time
  • London traders operate from 08:00 to 16:30 locally
  • New York's opening hours are from 09:30 to 16:00 locally

You need to be awake and ready to open your positions during these hours if you want to take advantage of these trading opportunities - or set up a copy trading account with ZuluTrade so your money is being invested whilst you sleep. 

We now know when financial markets are open, let's move on. 


Difference #5: Commissions

Commissions are the fees that you pay to a brokerage to carry out your requested transactions. 

Understanding your commission structure is vital when you start trading - it's a cost of doing business and it can eat into your profits, and potentially exacerbate your losses.

Stocks and forex traders generally pay different broker commissions, so let's explore both markets. 

Forex Trading

When you trade forex, it's likely that you'll pay no commissions. 

Sounds counterintuitive when we've seen how much money moves around the market, right? 

Profit is made in the spread with currency trading. 

This means that the difference in the bid and ask price is calculated so that the currency broker makes a profit on each trade without you ever seeing a debit from your account. 

The vast majority of currency brokers will charge zero, or very low, commission on your trading activity. 

To give an example, AAAFx, a brokerage supported on the ZuluTrade platform, charges 0% commission on their currency accounts, as shown below. 




Another cost that you could encounter is a swap fee.

A swap fee is charged when you hold an open position throughout the day and have to pay interest - or sometimes earn interest - on that position. 


Stock Trading

Stock traders tend to pay a commission to their brokers based on the value of each trade they make. 

Some brokerages will charge a percentage of the cash value, whilst others will charge per share traded, and there can be minimum fees too. 

There are some platforms that have commission-free trading, but these tend to be restricted to certain markets and may still charge for you to trade for an exchange-traded fund (ETF), commodities like precious metals, or even on exchanges in different countries. 

What's up next?

Difference #6: Leverage

When you're making trades on the stock or currency markets, the aim is profit, and leverage can help amplify that. 

Put simply, leverage is borrowing money so you can execute a bigger trade and increase your profits at little or no cost - although it will also increase any losses by the same amount. 

In trading terms, your brokerage will lend you the money to increase your position so you can buy and sell more currency or stock than you have in your account at the time. 

This can be a high-risk trading strategy; if you borrow too much money, or are overleveraged, you can wipe out all of your capital really quickly if a trade in either market doesn't go your way.  

How much leverage is available to both forex and stock traders is different, and we should note that the numbers we're about to look at are for retail traders - professional traders may have more leverage made available to them. 

With that, let's get into it.

Forex Trading

When you trade foreign currency, it's a high-volume market and can move fast, which makes it a place where lots of day traders do deals. 

Because of this high volume, it's common for brokers to be keen to lend money, or offer leverage to traders. 

The amount of leverage you can access is expressed as a ratio comparing the amount of money you can lend compared to the cash you hold in your broker account. 

This amount was regulated under the European Securities and Markets Authority (ESMA) in 2018, and is currently:

  • 30:1 for major, common currency pairs like USDEUR
  • 20:1 for minor, or less common currency pairs such as GBPAUD

With other limits on commodities and cryptocurrencies. 

In the USA, there aren't set ratios, although most brokers would likely only offer a ratio up to 50:1 for retail customers who do day trading. 

Stock Trading

When trading stock, there is less leverage made available to the majority of traders. 

Photo by David Vives on Unsplash

One of the reasons for this is because there is less volume being traded, like we saw earlier, so there is a bigger risk involved in lending money to trade with - it can be harder to get that money back because the market moves that little bit slower. 

In the USA, the Federal Reserve, or Fed, states that a trader can't borrow more than 50% of the value of the trade - this is known as Regulation T, or Reg T. 

Under the EU rules we've looked at, some stock trading leverage is also regulated, with indices capped at 20:1 and contracts for difference (CFDs) and other financial instruments being regulated, too. 

That's all the details you need to know about leverage, now it's on to the next market differentiator. 

 

Difference #7: Knowledge Level

When you want to get trading quickly, you want to choose a market where you can set up your trading account and get moving, so knowing the knowledge level you need is important. 

Of course, you need to put some effort into learning about whichever asset you want to trade, but how much you need to learn and whether you can pick up skills and information whilst trading are important factors to consider. 

That said, a lack of knowledge about the markets being traded in can cause huge losses and you still need to spend plenty of time researching anything you do before risking your money. 

How does foreign exchange and stock prices compare when it comes to the knowledge you need?

 

Forex Trading

Whilst there are around 200 currencies in the world, there are only a few major pairs that traders focus on. 

The top five most-traded currencies in the world are:

  • US dollar, USD
  • Euro, EUR
  • Japanese yen, JPY
  • Pound sterling, GBP
  • Australian dollar, AUD

This means that traders need only focus on learning how one or a few pairs combined from these currencies work and what to look out for as market signals to find success. 

Each pair you could make from these will have their own rhythm; there is a lot to learn, but there will likely be more information about these currencies and the trading pairs they make. .

Of course, there is a lot to learn when it comes to forex market trading and knowledge doesn't guarantee you will always make profits, but there isn't reams of information about whole continents to take in before you get started. 

 

Stock Trading

When you start trading stocks, you need to be able to carry out more technical analysis in terms of geopolitics, market sectors, and the fundamentals of stock trading.  

You need to understand the financial status of the stocks you want to trade and which external factors can affect the value, such as an oil company's stock price being affected by the price of oil. 

There are many, many more stocks to trade than there are currencies. On the NYSE alone there are 2,800 stocks to trade. 

Photo by Markus Spiske on Unsplash

Author’s Note: When you're ready to trade stocks, some of the most popular companies, such as Apple, Amazon, and Tesla can be traded through ZuluTrade. 

To really get to grips with trading stocks, you need to build more knowledge and have a deeper understanding of business and the wider economy than if you trade on forex currency markets. 

Moving on to the ninth difference between the two markets we're examining. 

 

Difference #8: Short Selling

Short selling is an advanced trading technique used by experienced professionals, where they borrow stocks that they think are likely to drop in price, sell them to someone else, and buy them back at the lower price to make a profit. 

You're unlikely to get involved in short selling as a beginner, but it is something worth knowing about since it's a risk in a market. 

Forex Trading

It is possible to short currencies in the fx market, or more specifically, to short sell a currency pair. 

To do this, a trader would borrow currency within a pair - usually from their broker - and sell it to the market, buying it back when the traded currency value falls. 

There is a risk in doing this, in that the value of the currency you're waiting to drop could sky-rocket and cost you a lot of money to buy enough to repay your debts. 

However, because you're working with currency pairs, it is less likely for the value of a currency to surge unexpectedly, any big fluctuations will still tend to end up with a pair going back to the historical mean average.  

Stock Trading

Short selling is a common trading tactic when it comes to the stock market. 

One of the reasons short selling is so popular is that it can be profitable in any market conditions, that is, whether the market is rising or falling, shorting can make money. 

It's by no means guaranteed that a stock will fall in the way a trader expects, and this can lead to losses when the stock actually increases. 

You may be invested in stocks in a company based on your research and assessment of the company's financial information, but an institutional investor can start shorting the stock and reduce the value of your position.

We've seen already that it's easier for the big players in the market to push changes in asset values, meaning you'll need a higher risk tolerance with stock trading.

Time for the final market differentiator we have for you. 

 

Difference #9: Trading Platforms

The way you, as a new trader, interact with the forex or stock market will be different in terms of who you need to deal with to get involved. 

There are similarities, in that you'll deal with either forex brokers or stockbrokers who will hold your cash and make the moves you request. 

You make these requests to buy and sell through a copy trading platform, like ZuluTrade, for example. 

How this works for both markets is different, so let's check it out. 

Forex Trading

When you trade forex on a trading platform, it will likely use ZTP - the ZuluTrade Platform - or MetaTrader 4 (MT4). 

These tools are specific to the forex trading market; although they can also trade CFDs which can allow you to trade stocks indirectly. 

Forex trading platforms can generally access all the forex markets around the world to keep you trading through all the open hours we looked at earlier. 

Stock Trading

For trading stock, the biggest trading platforms tend to have their own software, rather than using two or three dominant ones. 

There are also platforms that will interact with different brokers and different markets since stock exchanges aren't joined up in the same way that currency markets are. 

That's it for the differences between the stock and forex markets. 

Time to wrap this up. 


Now Over to You

 

We're done. 

These are the ten key differences between trading foreign currency and trading stocks. 

We've looked at a range of information like the size of the forex market compared to the stock markets, how the markets function, and how traders behave and deal with risk management in both. 

To try trading yourself or automatically copying the positions of professional traders, sign up for ZuluTrade, create or connect your broker account, and get started. 

You can even create a demo account to learn the ropes whilst you wait to get your broker account confirmed!

 

SIGN UP ON ZULUTRADE

 

Disclaimer

The views expressed do not constitute investment or any other advice/recommendation/suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in the report do not represent the opinion of ZuluTrade Social Trading Platform and do not constitute an offer or invitation to anyone to invest or trade. Every metric and the statistical number is a result of a past performance, which does not constitute a promise or a certainty for a future one.

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Trading spot currencies involves substantial risk and there is always the potential for loss. Your trading results may vary. Because the risk factor is high in the foreign exchange market trading, only genuine "risk" funds should be used in such trading. If you do not have the extra capital that you can afford to lose, you should not trade in the foreign exchange market. Forex Brokers and ZuluTrade are compensated for their services through the spread between the bid/ask prices or there may be a cost to initiate a trade through the bid/ask spread. Signing up is totally free, and there is NO contract and NO monthly fees, ever.

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