What is the difference between Forex trading and shares trading?

What is shares trading?

Shares trading can be simply defined as the buying and selling of stocks by a company with the goal of gaining a profit. When a company wants to expand, one of the best ways to do this is to be listed in the stock market.

When a company is listed in the stock market they hold an initial public offering, or IPO. An IPO means that outside investors can buy shares in the company in exchange for money. This helps the company earn the capital that they need to grow, while investors have the chance to invest in something now that may payoff big later.

Stock trading chart

What is the difference between shares and stocks?

You may hear the terms shares and stocks used interchangeably. That’s because they are referring to essentially the same thing. A company’s stock is the aggregate amount of their shares. For example, you can own stock in a company, and that stock is made up of some amount of individual shares.

What is forex trading?

The name “forex” is quite a giveaway, as it actually stands for “foreign exchange.” Forex trading is a relatively new concept, created in the 1970s, and is a way to exchange one currency for another. Currency is the different types of money around the world, for example, the currency in Spain is euros (€); the currency in England is pounds (£), and the currency in the United States is USD ($). So forex trading could mean trading euros for pounds on the foreign market.

What is currencies trading?

Differences between Forex trading and shares trading

Leverage/cost of entry

First of all, let’s take a look at what leverage meams, in terms of the stock market. Leverage is what you get when you borrow capital in order to be able make greater investment, so essentially it means debt. If you have greater leverage (borrowed more money) you can make more investments and increase your potential returns. Companies can also use leverage to invest in their own business operations, thus increasing the shareholder value.

In the stock market, you can usually trade with a maximum leverage of 2:1. That means you’ve borrowed twice the amount as you had on your own. However, to get this leverage, you must meet certain requirements, and you might not be approved for a margin account (the account needed to be able to leverage).

With forex trading, however, all you need to do is open an account, there are no requirements to be met. Many investors see this as a very tempting reason to engage in forex trading instead of normal shares trading. However, since you are taking out more debt for leverage, not only do you have the opportunity to earn more, you also have the opportunity to lose more. It’s just like gambling with more money.

Accessibility

In order to trade shares, you must do so at a stock exchange like the New York Stock Exchange, which generally has a trading window from 9:30 a.m. to 4:00 p.m. Forex trading, on the other hand is done privately, and can be done six days of the week, 24 hours a day. And since it’s done across time zones, you’ll always find a market open. To that point, trading on the stock exchange is considered safer, because there are records of exchanges. Additionally, some traders find the record keeping useful in order to track and analyze earnings.

Simultaneous exchange

When you trade in the Forex market, you are simultaneously buying and selling currency. That means you have to analyze how well the currency is doing from the country you are selling, and how well the currency is doing in the country from where you are buying it. Stock trading is different, because you are only doing one thing at a time, either buying or selling.

Liquidity

The Forex market trades in a much higher volume compared to the stock market. In fact, the Forex market involves around $5 trillion in trading a day, whereas the stock market averages around $200 billion a day in trading.

When a market has a higher volume of trading, it also has greater liquidity. Liquidity refers to the ease with which you can buy and sell shares without affecting the price of the asset. Therefore, the Forex market has higher liquidity than the stock market.

Tighter spreads

A spread is the range between the bidding and asking price. On the stock market, spreads are generally quite wide, whereas in Forex trading, spreads tend to be much lower. This means that buyers and sellers generally agree on the worth of the asset being exchanged, and you as an investor will receive more of the profit than if the spread were wider.

Speculation

Speculative trading is when you participate in a financial transaction that has both a greater risk of losing a lot of money, but also makes it possible to gain a lot more as well. In the stock market, there isn’t as much speculation, as you need a lot of capital to do so, and the risk can be too great. Since you don’t need a lot of leverage in the Forex market, you can speculate for less.  

These are just some of the main differences between forex trading and shares trading; there are quite a few more. To sum it up, forex trading is appealing to many because you don’t need a lot of capital to begin, so investment opportunities are greatly increased. It’s also more accessible and has greater flexibility in general. The stock market is considered to be more regulated, with less risk involved.

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