What is Forex Trading?The term “Forex” is short for “Foreign Exchange.” Forex trading is the process of buying and selling currency pairs. The Forex market is open 24 hours a day and is decentralized i.e. it represents a trading network of participants from around the world. The biggest players in the forex market include investment banks, central banks, hedge funds, and commercial companies, etc. [Suggested Reading: ‘What is Currency Trading or Forex Trading?’]
What is Stock Trading?A stock represents your ownership in a company. Stock market trading is buying and selling shares or stocks to earn profit. Stock traders aim to buy stocks at a low price and sell at a high price. Factors that can influence the price of stocks include the company's management team, the overall state of the economy, business decisions, market sentiment etc. There are 2 main types of stock market traders:
- Intraday traders - Short term traders
- Delivery traders - long term investors
1. Market trading hours
- The Forex Market: The forex market is a seamless 24-hour market and it has no single central location as the participants are spread across the globe.
- The Stock Market: In India, the stock market timings are 9:00 to 3:30. Besides, the markets are closed on weekends and public holidays.
2. Market influencesAnother factor to consider before trading in forex or shares is what causes the price fluctuations. Primarily, both markets are influenced by supply and demand, but there are many other factors that can cause price fluctuations.
- The Forex Market: In the forex market, you generally need to consider the macroeconomics of the country – for example, unemployment, inflation and GDP, as well as news and political events.
- The Stock Market: When trading shares, you need to focus on a few factors that directly impact the company you want to invest in like company’s debt levels, cash flows and earnings, economic data, news reports and sector health, etc.
3. LiquidityLiquidity is the ease at which your asset can be sold in the market. Liquidity is important because, higher the trading volume, the more money flows through the market. This makes it easier for you to find someone to take the other side of your position.
- The Forex Market: Forex is the largest and most liquid financial market in the world. According to a study by The Reserve Bank of India, “The OTC Forex market has an average daily volume of about USD 33 billion.”
- The Stock Market: The stock market has comparatively fewer trades per day, but shares are still easy to access and trade. Large, popular blue-chip stocks such as Reliance, ITC, ACC Cement, HUL, HDFC Bank, etc are the most liquid.
4. VolatilityVolatility is a measure of how likely share or currency prices will fluctuate. A market with high volatility will change prices quickly, whereas markets with low volatility tend to have more gradual price changes.
- The Forex Market: Forex is traded all around the world which makes it extremely 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 quickly.
- The Stock Market: The stock market tends to have more stable price patterns that you can track over time. Similar to the forex market, it can see periods of volatility and is especially sensitive to domestic politics.
Summary of Forex Trading vs Stock Trading
|Market trading hours
|Type of Traders
|Forex vs Stocks
|It is a trading style where the trader looks to open and close trades within minutes by taking advantage of small price movements of the markets.
|Traders can focus more on volatility and liquidity and less on fundamental variables that move the market.
|As a result of placing more trades, beginners may lose more money if their strategy isn't fine tuned.
|Suitable for both Forex traders and Intraday share traders.
|A trading style where the trader looks to hold positions for one or more days.
|Lower capital requirements compared with other styles because a trader is looking for larger moves.
|Thorough research is needed before executing the trades.
|Suited to trading forex and delivery traders.
|A trading style where a trader looks to hold positions for months or years.
|Traders do not have to spend as much time analysing the market after the investment is done.
|Long-term investing requires you to have a deep knowledge of the market that you are investing in.
|Suited more to stock investors.