Forex vs the Stock Market

The stock market attracts many traders on a day-to-day basis, as it is characterised by many swings and fluctuations. These swings are the bread and butter for traders, as they are where profits can be made. Such swings are exactly the reason why the Forex market is so popular as well. If the market were to be characterised by small movements, or mostly ranges, it would be difficult to capitalize on such moves, and the trading concept would not be so widely accepted.

So far you should have an idea about what drives the Forex market, and what foreign exchange entails. Some traders are still confused when looking for a market to trade, and don’t know what to trade: stocks or Forex. Are these two markets equally risky? Is the approach the same, or should traders consider different factors when trading them?

Differences Between the Two Markets

There are some notable differences between the two markets that must be mentioned here. From the brokers that offer the financial products to be traded, all the way to the factors that influence the markets, everything is different. Below are listed the main factors that matter when trading both Forex and stocks. Please note that they are not listed based on their relevance, but simply because traders must know the difference between these markets.

* T&Cs apply to each of the offers. Click “Trade” for more details

The Way to Trade Them

The main difference between the two financial markets comes from the way they are traded. To be more exact, stock market trading has some limitations that are not seen on the Forex market. For a start, when trading stocks, it is not possible to sell a stock, unless you already own it. This sounds only normal, but on the Forex market, one can sell a currency pair without owning it. In other words, you can go short on EUR/USD, for example, on the Forex market, and if the currency pair is moving south, you can bank on that move and make a profit by covering the short (hence closing the position with a long) at lower levels. This is not possible on the stock market. By contrast, the only way to sell a stock is to own it. This means that you must buy it first, and if it moves against you, you can sell it, only at a loss. If it moves upward, you can sell it for a profit, but you must own it first, and this leads to the need for different trading strategies to be in place for the stock and Forex markets.

Brokers to Trade Them

You may find it difficult to believe, but there are few  brokers that offer you the possibility of trading both Forex and stocks on the same trading account. Moreover, there is unlikely that a broker will offer both products. Therefore, either you trade stocks with a dedicated broker for the stock market, or you don’t trade them at all. It means that to trade both stocks and Forex, you need to have trading accounts with two different entities, or brokerage houses. Margins needed for trading the two markets are different too. While the Forex market is known to be the most leveraged one, on the stock market a cash account is mostly used to cover the expenses when buying stocks. There are, though, stock brokers that offer margin trading as well, but this is not widespread as it is in the case of Forex trading. Moreover, costs are different when trading Forex and stocks, with the latter being more expensive.

Factors that Make the Two Markets Move

stock market vs forexLike any financial product, supply and demand govern the way the product moves. If there is bigger volume on the long side, the product will move up, and vice versa if the volume on the short side is bigger. Both markets move based on fundamental and technical factors. Fundamental analysis is news-related, which means that when economic news, such as unemployment rate, Gross Domestic Product (GDP), interest rates, retail sales, etc., is released, both markets move. However, they do not move the same on fundamental analysis.

Technical analysis, on the other hand, is based on interpreted previous patterns that formed back in time with the purpose of forecasting future price levels. Regardless of the financial product traded, technical analysis is the same. We do however need to differentiate between two things: trading stocks and trading indices. An index moves based on the aggregate move of the stocks that are part of it. For example, the Dow Jones Industrial Average (DJIA) is based on 30 companies. Because of that, it is also called the Dow30. The way these 30 stock prices are moving will determine whether the Dow Jones will end up higher or lower on any given day. However, the companies represented in the Dow do not have the same weight: some represent 0.5% of the whole index, others 1.7%, and so on. This makes it possible for the Dow to be positive if the heavily weighted companies in the index are green and the other ones red; and the converse is true as well! There is an index for any stock market in the world, and these indexes are offered by Forex brokers as well, as individual and separate financial products. There is therefore no need to have a separate trading account to trade indices. However, it is not possible to trade one single stock on an index with a Forex trading account. If your broker says it is possible, think again: what the broker is offering for trading is a Contract for Difference (CFD) and not the real stock. For more about CFDs, please refer to the article dedicated to that subject here on our Trading Academy: Forex vs CFDs. As a reminder, CFDs are one of the most riskier financial assets to be traded, and as such require considerable margin in the trading account.

There are other factors that are different for the stock market when compared with the Forex one. One such factor is the earnings calendar. On a quarterly basis, companies around the world release their earnings, and traders react to these releases by taking a position in a new company, or simply closing a previous position. Moreover, in between these quarterly releases, stocks are  rated by analysts. When these ratings change to different levels, from buy to neutral or sell, the price of an individual stock changes. This does not happen on the Forex market, as the dynamics are simply different when compared with the stock market. Keep in mind that what we have discussed here about the stock and Forex markets is only a few of the things that differentiate between the two. They are clearly distinct ones, and one should be aware of that before engaging in trading.

Recommended Further Reading

Other Educational Materials