Finance

Stocks vs. Forex – What are the Main Differences?

Stocks vs. Forex

Arguably, the forex and stock markets are among the most coveted in the world among investors, boasting combined daily trading volumes in excess of $6 trillion.

Sure, the majority of this sum is contributed by the forex market, but the depth and diversity of stocks continues to offer huge appeal to investors across the board.

Both markets share some similarities too, such as the need for traders to develop viable trading strategies and the presence of extensive regulatory measures for brokers to follow. 

In this post, however, we’ll appraise the main differences between stocks and forex, while asking which asset class is best for you.

#1.  Market Trading Hours

Interestingly, it’s the derivative forex market that dominates daily trading volumes, thanks at least in part to its core trading hours.

More specifically, the forex market is open and accessible 24 hours a day and five days a week, due to the overlap between different time zones and activity across three separate trading sessions.

These take place in North America, Europe and the Asia-Pacific region, while the market closes on Friday evening before reopening again on Sunday night (GMT).

Conversely, there’s a set daily timetable for stock market trading hours, depending on the specific region and exchange in question. For example, the London Stock Exchange (LSE) is open between 08:00 and 16:30 each day, creating a far more rigid schedule for investors to adhere to.

As you can see, both markets are closed over the course of the weekend, with Saturday seeing absolutely no trading activity at all.

#2. The Volume of Assets

One of the most appealing aspects of the forex market is the sheer volume of assets included within. 

This will vary from one broker to another, of course, but on average investors can access around 330 currency pairs including major, minor and exotic options.

Of course, it’s so-called “major” currency pairs that dominate daily trading platforms, with these seven pairings (each of which pit the USD against seven other leading currencies) accounting for 68% of the total volume. The USD is also on one side of 88% of all currency trades, so it’s clear to see where much of the money is being invested.

However, there remain some 170 different currencies combined within a huge number of pairs, creating choice and flexibility to investors across the globe.

While it can be argued that the stock market offers access to endless opportunities, it’s average daily trading volume is considerably lower than that of forex.

For example, approximately $6.6 trillion is traded globally on the forex market (up from $5.1 billion in 2016), while the corresponding number for stock market trading is just $200 billion.

Also, it can be argued that the endless range of stock options available to traders puts them at a distinct disadvantage, which is why index and ETF trading remain such popular vehicles in the modern age.

#3. Volatility and Liquidity

The term ‘volatility’ measures price fluctuations within specific markets, providing investors with a gauge of potential profits and loss over time.

Typically, the forex market is renowned for offering higher levels of volatility, with currency pairs (particularly major assets) noticeably more liquid than stocks. Liquidity refers to the ease with which assets can be bought and sold in the marketplace, creating higher trading volumes and volatility levels on a daily basis.

Given this and the derivative nature of forex (which enables traders to speculate and profit without assuming ownership of the underlying asset), forex is often preferred by short-term investors who want to leverage volatility to optimise their profits.

Conversely, traditional stock trading is synonymous with buy-and-hold investment strategies, whereby traders invest in targeted shares and retain these as they appreciate in value over time.

This means that stocks are considerably less volatile and liquid than forex assets, making them ideal for long-term investors who want to grow their profits organically and while minimising risk.

The Last Word – Is There Any Correlation Between Stocks and Forex?

As we can see, there are numerous differences between stocks and forex trading, but is there any correlation at all between these two markets?

Remember, it’s common practice for traders to seek out this type of correlation between asset classes, with a view to accurately forecasting market outcomes and building an increasingly diverse portfolio.

There’s certainly historical evidence of a correlation between stocks and forex. For example, prior to the financial crash of 2008, some traders identified a trend between the safe-haven USD/JPY currency pair and the Nikkei stock index.

As the latter declined, traders began to recognise this as a sign of wider economic weakness, strengthening the greenback against the Japanese yen as a risk-averse outlook began to take hold.

This type of inverse correlation is common, while it can also help more experienced traders to pre-empt future market movements and make more informed decisions pertaining to both stocks and currencies.

On a fundamental level, stocks and forex also combine well together during the analysis of technical trading patterns. This is due largely to the impact that the macroeconomic climate has on currency prices, from interest rates and inflation to international trade flows.

Of course, correlation is never guaranteed, particularly when you consider the relatively volatile nature of both markets. 

So, you’ll need to keep this in mind during the process of technical analysis, while also remembering the key differences that distinguish the stock market from the foreign exchange.

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