When people think of trading, the first associations are currencies and stocks. Both are accessible in South Africa, even from a smartphone. At the moment, FXTM stock trading is increasingly popular. But is it the best path for everyone?
Two Popular Markets
The foreign exchange is the largest financial market with a stunning daily volume ($5+ trillion). Retail traders (i.e., individuals) buy and sell currencies alongside banks, hedge funds, and corporations. This OTC market is entirely electronic and decentralized.
Stock trading has also been digitized. While physical exchanges still exist, most shares are bought and sold online. Scenes from old Hollywood movies, when pit brokers phone their clients, are a relic of the past.
Any individual with sufficient capital may open an account online through a broker. Then, deposit some money and buy some stocks. The fundamental logic is the same as in Forex — you buy low and sell high.
Thanks to technological advances of recent years, both markets are easily accessible. However, the learning process and trading itself have important distinctions. Here are the key differences between trading currencies and trading stocks.
Long-Term or Short-Term
In Forex trading, positions may remain open for minutes, days, or weeks. It all depends on your strategy. Still, it is mostly associated with hectic action like scalping. A trader opens and closes multiple trades throughout the day, aiming to capitalize on a string of minor profits. Currency exchange rates are fluid and driven by numerous political and economic events.
The stock market allows you to become a trader or investor. In the latter case, you hold on to your assets for months or years. A shareholder is entitled to dividends based on the performance of the issuing company. Meanwhile, stock traders focus on momentary changes. They may buy and sell securities on the same day.
In terms of range, stock trading is more confusing. In Forex, you have a few dozen pairs to choose from. Pick one or more currency pairs you understand best, and track their dynamics. Buy when the price is rising, and sell before it falls. As the rates are always changing, these fundamentals are straightforward.
Meanwhile, thousands of shares are bought and sold every day. Some traders zoom in on a few options and ignore the rest of the market. Others seek out the best opportunities. They hop between stocks, investing in the most promising shares and short selling when the market starts falling.
Methods of Analysis
In both markets, technical analysts rely on charts and time frames. The biggest differences are found in fundamental analysis. To trade stocks successfully, you need to know how different companies are doing.
This means understanding their balance sheets and other financial data. You need knowledge of previous and planned partnerships, historical performance, revenue figures, and more. The Forextime broker has a wealth of information covering the subject.
Forex traders monitor the economies their pair represent. Every instrument is a base currency valued against a quote currency. For instance, someone trading EUR/USD should monitor the health of the European and American systems. In addition, you keep track of the public sentiment, but the complexity is still lower.
Comparison of Liquidity
Highly liquid instruments are easy to buy and sell, as you find a counterparty immediately. In stock trading, this is more complicated. Sometimes there is no match for your order, so it is not filled. Stocks of lesser-known companies are more difficult to trade.
Of course, you may focus on the largest players, but some emerging startups have high growth potential. In comparison, Forex is much more liquid. Traders may experience problems with obscure combinations connected to emerging economies. Still, finding a match is generally easier.
Comparison of Leverage
Both markets allow leverage. Traders use a portion of funds from brokers to rake in higher profits (if they are successful). However, the ratios are very different. Stock traders may be disappointed to find that 1:2 is their only option. In Forex, brokers are more generous. Most commonly, currencies are traded on the margin between 1:33 and 1:100.
Comparison of Market Hours
Stocks are traded during regular business hours on weekdays. Meanwhile, Forex is available 24 hours per day 5 full days a week. Traders may work in the morning, afternoon, or evening. When different trading sessions overlap, the market sees maximized liquidity and volumes.
The Bottom Line
As you can see, the currency market is more liquid and accessible. It also offers higher leverage, and there is less research to conduct. Still, stocks may bring substantial profits. A prudent trader needs to develop a balanced portfolio with exposure to various unrelated markets.