In the era of ever-evolving technology wherein, everything is going online, even the methods of investments have drastically changed. People started from buying gold or investing into real-estate and now they have moved on to dealing in foreign exchange or stocks. These two are the most promising and prominent methods of investment in the present times. But in order to decide which one is better, there are various points of differences which must be considered before investing into one.
After detailed research, following differences have been deduced:
The forex market facilitates exchanges between different currencies globally. It helps in determining the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. It is an over-the-counter market and the most decentralised market.
The stock market is a combined group of buyers and sellers who are dealing in shares or stocks. Stocks or equities represent fractional ownership in a company and the stock market is a place where investors can buy and sell ownership of such investible assets.
- Market Size
According to the Bank for International Settlements triennial report of 2016, the foreign exchange market cap averaged $5.1 trillion per day which equates roughly around US$ 1861.5 trillion. The magnificent size makes it the world’s largest financial market.
As of 2017, the size of the world stock market was about US$79.225 trillion.
It is defined as the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.
The forex market is extremely liquid because all the major world currencies are highly liquid. Also, the number of people who are involved in forex trading at the same time is humungous.
On the other hand, the stock market is highly variable. It runs on the principles of demand and supply. Therefore, it is considered lesser liquid with a few major companies acting as exceptions.
The forex market has a much wider focus. Since a currency’s value is dependent upon the aggregate performance of the entire economy. In this market, international currencies are involved. So, the forex trader has to focus not only one but two economies in order to earn maximum profits.
However, in the case of the stock market, the value of a stock is dependent on much lesser variables. It is mainly dependent on the cash flows, earnings, debt levels of the respective company.
In financial terminology, leverage is a smart investment strategy to use borrowed money to increase the potential return of an investment.
Evidently, the forex market offers superior leverage. Usually, 1:10 leverage rate is considered to be the best kind. But in the case of the forex market, it can go up to 1:1500.
Conversely, the leverage rate offered by the stock market is as low as 1:2.
- Market Accessibility
The forex market provides ease of working at any hour of the weekday. Also, no geographical boundaries can stop you. This is an additional bonus to the traders as they can still be connected with this market even with their normal working schedules.
In contrary to this, stock traders can only work on the hours depending upon the hours of their respective stock exchange.
Risk is an uncertainty associated with the investment.
Since the forex market is very dynamic and volatile, the risk factor is comparatively larger.
In the case of the stock market, the risk is lesser and if invested appropriately, the risk can be easily mitigated.
- Rules and Regulations
Rules and regulations guiding the forex market are comparatively much lesser than the stock market. It is due to the huge number of people who are trading and the number of transactions happening every day. However, there are institutional bodies controlling the trade under stock market.
A dividend is the distribution of reward from a portion of company’s earnings and is paid to a class of its shareholders.
In the case of the forex market, there are no dividends.
On the other hand, stock companies usually pay dividends to its shareholders for their trust in the company.
- Span of Reaction
The time span which is given to an individual to react to any news and decide whether to invest more or pull out the investment is another important factor which must be considered.
In the case of the forex market, the values vary at a much faster pace. So, if one wants to make money, they must react quickly.
While in the case of stocks, the gradual trends can be tracked over time. It’s doesn’t change momentarily.
- Number of factors concerned
The basic functioning of both the markets is quite similar; both are dependent on the supply and demand of their factors. The traders are involved in buying one and then selling it at a much higher price to earn good profits.
In case of the forex market, most of the volume is concentrated in a very small number of currencies. These currencies which are traded mostly are called major currencies. Only eight currencies fall under this group: U. S. Dollars, European Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar and South African Rand. Rest of the currencies are called minor currencies. Most commonly used currency is U. S. Dollars.
On the other hand, considering the stock market, there are around 4000 companies which are registered with NASDAQ. And there are another 15000 stocks which are traded over-the-counter.
The internet and electronic commerce have opened the doors to numerous traders and investors round the world to participate in any of the growing markets. Deciding which is the most suitable can be a tedious task. After an in-depth analysis, conclusions can be drawn. If one desires for minimal profits with lesser risk, the stock market would be a perfect choice. It requires studying the trends of a company or at max a few. But if someone can deeply analyse an economy and devote time to this, then forex market can be their angel. It gives a higher profit but comes with a cost of higher risk as well. Ultimately, the decision between trade stocks or forex is largely based on risk tolerance, account size and convenience.