The foreign exchange and equities markets are the two biggest financial marketplaces in the world.
Traders and investors must decide which suits them best. Maybe both?
But they are different, and your decision should be based n your trading strategy, style, and appetite for risk.
This article compares them allowing you to understand the differences and decide which is best for you.
How are trading forex and equities different?
Firstly, you are trading different things or securities.
Forex or Foreign Exchange, or FX is the market for currencies.
In comparison, the equities market is a stock market – often a stock exchange – dealing in the shares, which are parts of the ownership of a company.
The main reason to choose one over the other should be your preference for dealing in countries’ currencies or the shares of a company.
The trading of each asset is different.
There are advantages and disadvantages to each.
Forex Equities
Market trading hours
As forex e genuinely global market, you can trade 24 hours a day, five days a week. You have ample opportunities for trading. It also creates the risk of the market moving while you are watching. It is vital to have a risk management strategy with appropriate stops and limits to protect your trades from unnecessary losses. The best time to trade Forex is when the market is the most active, usually when two sessions overlap, as there will be a higher number of buyers and sellers. For example, if you were interested in GBP/USD, London and New York trading hours overlap between 12 pm to 4 pm (London time). The increased liquidity will speed up transactions and even lower the cost of spreads. The London opening at around 7 am is another very liquid time of the day as London remains the global center for Forex trading. When the London traders start their day, the Forex market starts its day.
Market trading hours
Equities trading is different, as it is often limited to the opening hours of whichever exchange the shares are listed on. Increasingly extended hours are offered to traders today, which means you can act quickly on breaking news, even when the market is closed. The equity trading day is getting longer for most big stock exchanges. The increasing popularity of equity Contracts for differences (CFD’s) has assisted the lengthening the liquid trading part of the day.
What Moves Forex
What makes currencies go up and down is diverse and a complex range. You generally need to take the macroeconomics of the country into consideration. For example, unemployment, inflation, and gross domestic product (GDP), as well as news and political events. And because you are buying one currency while selling another, you need to be aware of the performance of not just one economy but two and rate them versus each other.
What moves Equities
When trading equities, you must concentrate on a few factors that directly impact your chosen company including the company’s debt levels, cash flows, and earnings, as well as economic data, news reports and sector health, and the state of the overall stock market indices.
Forex is the Most Liquid Market in the World
Forex is the largest and most popular financial market globally, which means it is incredibly liquid and frequently sees a daily turnover of trillions of dollars. Liquidity can change through the day as different sessions open and close around the world. Liquidity also varies greatly depending on which Forex pair you choose to trade. Just eight currency pairs account for the most trading volume. For example, the dollar is involved in almost 75% of all forex trades, according to the Bank of International Settlements.
Global Equities Offer Many Hundreds of Thousands of Liquid Stocks
The equities market sees fewer trades per day than Forex, but shares are still easy to access and trade. Large, popular stocks such as Apple, Microsoft, or Facebook ? are the most liquid as there are usually willing buyers and sellers. Once you move away from blue chips, there is often significantly less liquidity.
Volatility in the Forex Markets
The ease at which Forex can be traded makes it highly volatile. Though the market will usually trade within a small range, the vast number of trades taking place on the forex market can cause prices to change very quickly. When trading Forex, it is vital to keep up with political, economic, and social events. The market is prone to sudden and drastic movements in response to these announcements. The Forex market is a very emotional place.
Equity Volatility
Equities tend to have more stable price patterns. But, like Forex, it can see periods of volatility and is especially sensitive to domestic politics. Trading volatility can potentially provide many opportunities for traders to profit, but it also comes with increased risk, making it essential to take steps to prevent unnecessary loss.
Leverage in Forex
Though it can be an advantage of both share trading and forex trading alike, it is a feature of currency trading. Forex traders usually have a much larger leverage ratio, in some countries as much as 200:1. But leverage is a double-edged sword: though it can magnify returns, it can also magnify losses.
Leverage in Equities
Leveraged trading enables you to gain exposure to markets with just a fraction of the capital customarily required if you buy a stock. Leveraged products, such as CFDs can be used to trade on margin across various markets. Whichever market you choose, it is essential to be aware of the size of your exposure and understand the risks involved.
Being Long or Short in Forex
Since forex trading involves two positions – buying one currency and selling another, traders have always been able to participate in falling and rising markets.
Being Long or Short in Equities
When investing in equities, you traditionally only take a long position, as you would be looking to profit from any future increase in the value of a company’s stock. But thanks to derivative products, such as CFDs, you can go long and short on company shares giving you equal access to trading opportunities whatever the market’s future direction.
Forex or Equities?
When deciding whether you should trade Forex or equities, there is no correct answer because there are benefits and drawbacks to each market.
Ultimately, your decision will come down to your personal preferences and attitude toward risk.
When making your decision, you need to take into consideration your trading style and financial goals.
If you are interested in a fast-paced environment, Forex provides excellent opportunities for short-term traders – such as day traders, scalp traders, or swing traders.
If you’re looking to take advantage of short to mid-term trends, or less volatility, or you are an investor, the equities market could be for you.
