Difference between Forex and Stock trading

People who are new to trading get confused between the forex market and the stock market; they even use these terms interchangeably. Forex stands for foreign exchange, and it is the trading of currencies in the international market.  This is a highly liquid market, incurring more than 5 trillion US dollars in a day. On the other hand, the stock market is a highly regulated industry with a low volume, bearing about 200 billion US dollars in a day. Stocks have been popular for a very long time and are considered to be a safer medium of trading while forex is relatively new and has gained momentum quickly in the past few decades.

Forex stands

The stock markets, all around the world are centrally regulated by authorities which gives them more of physical quality and make it safer for the investors both new and experienced. Popular exchange markets are the New York stock exchange in the West and the Bombay Stock exchange in the East. Any central authority does not regulate the forex market, all transactions are done in an over the counter manner, privately between the two parties involved in the deal, which makes the stock market a favourable choice for experienced investors.

Both these financial markets are user friendly, but forex attracts the new traders more because of its low brokerage rates and minimal cost of entry. Forex allows you to earn large amounts of profits in a short period of time, but the risk is also very high as compared to the stock market. Stock trading can only be done for a limited window of eight hours, commonly refers as 9 to 5 while the forex traders can indulge in deals 24/7. Since forex is not under the control of any central authority, the risk of being cheated and schemed is way higher than in the traditional stock market.

foreign exchange

The primary difference between foreign exchange and stock trading is that when currencies are traded, there is always one buyer and one seller engaged in exchanging currencies at the same time, there is no option of holding on to the investment. A stock market is a place where you buy a share in exchange for money when the market is down, and you hold on to that stock until the market rises and you sell it with a profit.

The forex market is famous because it provides a very high leverage point somewhere around 50:1 on an average. This is both an advantage and a disadvantage as this increases the chance of getting a profit, but it also escalates your risk of losing all of it. The stock market is a much calmer pool with the average leverage being 2:1, the only problem with that is, if you want to earn substantial profits, you will have to have huge capital.

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