Trading financial markets rotate around the same concept which is buying low, sell high. But while most novice and intermediate traders have the preconception that they can easily transition or expand to new markets with minimal to no adjustments necessary, there remain quite significant dissimilarities between the stock and forex markets.
WHAT IS STOCK TRADING?
Stock trading, also known as equity trading, involves speculation of company stock prices. An exchange is established wherein buyers and sellers can meet and decide on the price they wish to buy or sell a certain stock or basket of stocks. In the past, stock trading could only be done through physical exchanges or pits that encapsulated the chaotic transactions between buyers and sellers. While such exchanges remain vibrant today, most traders and brokers are managing their interests via the Internet.
WHAT IS FOREX TRADING?
The definition of forex trading is similar to that of stock trading. The only evident difference, however, is that forex trading involves hypothesis of currencies. Forex trading can be further broken down into spot or retail forex exchange trading and futures exchange trading, the latter of which involves predicting the future prices of an underlying asset.
Below is a breakdown of some of the major differences that might not be obvious to everyone.
1. TRADING HOURS
Both the stock market and the forex market operate on a strict schedule. Most stock market operates for eight hours, and then closes until the next morning when it opens for trading again. In contrast, there is no downtime in forex trading. The forex market operates twenty-four hours a day in 3 shifts, throughout the entire year.
2. FINANCIAL FRICTION
The stock market always requires a middleman, which thus results in more financial friction. Every time a stock is sold, a middleman, be it a broker or some other entity, is always standing between buyer and seller. They make money just to facilitate the trade. The same is the case every time a stock is bought. You have to go through a middleman. That is not the case with forex trading. In the forex market, a trader can buy or sell directly by spot trading because the forex market is not centralized. The edge is, in the forex market, the spreads are transparent. Besides, most brokers don't require additional transaction fee or even charge a commission.
Every activity that takes place in the forex market is directly or indirectly related to the major currency pairs. Of course, one could argue that in forex trading, you got to do a lot of formulation and study for a sound forex market analysis. Compare this to keeping tabs on thousands of stocks in the stock market. In forex markets, currency traders have the advantage of using forex systems. These systems help a currency trader in knowing the best time to sell, or buy a currency.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.