Forums » News and Announcements
FOREX VS STOCKS
-
FOREX VS STOCKS
It’s never been easier to start trading in the financial markets. Advances in online brokerage accounts and charting software mean that you can earn money trading from the comfort of your home or office — it’s no longer confined to denizens of Wall Street or the Chicago trading pits.To get more news about forex vs. stock, you can visit wikifx.com official website.
When most people hear the word “trading”, they immediately envision people trading the stock market. However, forex trading has become increasingly attractive as the once-exclusive currency market has recently opened up to retail traders. But which is right for you? Stock trading or forex trading? We’ll take a closer look at the similarities and differences between stock trading and forex trading. We’ll also show you the pros and cons of each trading type to help you get started trading your asset of choice.
What is Forex Trading?
The word “forex” is short for “foreign exchange” and refers to a decentralized global marketplace for national currencies. You also might sometimes hear people refer to forex trading as “FX trading.” A transaction in the forex market involves an exchange of one currency for another.
Currencies trade in pairs in the forex market, and forex trading involves buying and selling currency pairs. In general, the goal of forex trading is to buy a currency pair when it’s undervalued and sell it when it rises in value, or sell when overvalued and buy back when the pair drops in value.Most countries issue their own national currency. The value of each currency varies in relation to other currencies. The rate at which currencies are exchanged in the forex market is known as an “exchange rate”. Furthermore, the “dealing spread” for a currency pair is the difference between a market maker’s bid and offer exchange rates.
According to the concept of purchasing power parity or PPP, two currencies find their equilibrium exchange rate, which is known as the currencies being at par, when a basket of goods costs the same in both countries given their currencies’ exchange rate.
If you’ve ever traveled abroad, you might have converted a small amount of the cash you brought with you into the country’s local currency and found that your money went further or was spent faster than at home.
For example, if a U.S. resident travels to England, they might find that the UK’s pound sterling currency is worth 1.4000 U.S. dollars. They might pay $2 for a bottle of water in London that would only cost them $1 if it was bought somewhere in the United States. If this relationship was observed for a wider basket of goods, it would suggest that the U.S. dollar is undervalued versus the British pound.
Some long-term forex traders aim to take advantage of this difference in purchasing power among currencies by strategically exchanging an overvalued currency for an undervalued currency and then waiting for the market to shift toward equilibrium.
What is Stock Trading?
Stock trading involves buying and selling individual shares of a company, called “stock.” A share of stock is a small piece of ownership in a company.While currency pairs have an exchange rate that moves frequently, shares of stock instead have a price that fluctuates in price throughout the day, week and month. Factors like a company’s management team, the overall state of the economy and the business decisions the company makes can all influence what each individual share of stock is worth.
Stock traders aim to buy a stock when it’s undervalued and sell it when it rises in value, or they might sell when a stock is overvalued and buy back when the price falls. There are 2 main types of stock traders who operate in the stock market for profit:
Similarities Between Stock Trading and Forex Trading
Stock and forex trading are similar in some ways, although in forex trading you speculate on movements in a currency pair’s exchange, while in the stock market, you buy or sell a share of a company in the hope that its price will shift in your favor. Let’s examine some additional similarities and differences between these financial markets.Brokers
A stockbroker takes orders to buy or sell corporate shares on your behalf on a centralized stock exchange at a transparent price for a small fee or commission. Stockbrokers traditionally charged a commission for this execution service, although many major U.S. stockbrokers have recently eliminated such commissions.A forex broker also executes orders on your behalf but in the decentralized forex market where currencies are exchanged. Also, the tradeable asset in a forex transaction is a currency pair that involves you buying one currency and selling the other. A forex broker usually does not charge commission but instead widens the dealing spread to make their money.
Both stock traders and retail forex traders use brokers to facilitate their transactions. You can quickly create a stock or forex trading account online and begin trading as soon as you fund your account.
While U.S. stockbrokers will generally offer access to the stock market, not every broker provides access to the forex market, so you might need to open a separate account with an online forex broker to trade currency pairs. To learn more about online brokers that offer forex trading, check out our list of the top forex brokers.
Short-Term Trading
Both forex traders and stock traders rely on relatively short-term trading strategies. A stock trader who’s trading with the intent to make a quick profit usually won’t be interested in holding onto his or her stock for years to come. Similarly, a forex trader only wants to hold a currency position until they can trade out of it for a profit.Technical Analysis
Technical analysis is a type of financial analysis that uses patterns and indicators to inform a trader when he or she should buy or sell an asset. Traders who use technical analysis to inform their trading strategy typically don’t spend a lot of time reading the news or researching a company’s business plan. Instead, they may look at candlestick charts for indicators that a stock or currency will drop or rise in price soon.Both forex traders and stock traders primarily rely on technical analysis when they decide what they should buy or sell. Because the price of a stock or currency may change on a minute-to-minute basis, it’s important that you have a reliable technical analysis program to inform your trading.