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Entering the world of financial markets can be both thrilling and daunting for newcomers. It offers a variety of assets, such as bonds, commodities, and derivatives.
Yet, two options are more popular and prominent—forex and stock trading remain the most favored, given their global coverage.
They offer many opportunities to create wealth in a relatively shorter period. However, they also have their fair share of risks and challenges.
Given their volatility and sensitivity to macroeconomic changes, they are no longer strangers to numerous crises and bubbles. These make them optimal choices for traders with a high risk appetite or tolerance since earnings are much higher than other investments.
As beginners, you should distinguish which works better. This will depend on investment objectives, risk tolerance, and goals. Hence, this article will cover the stock and forex market.
Forex Basics
The Foreign Exchange Market, or simply Forex or FX, is considered the world’s most liquid and largest financial market.
Forex trading lets investors buy one fiat currency in exchange for another to earn from exchange rate fluctuations and differences. It can be bought and sold through a forex broker and exchanges.
Major currency pairs include USD/EUR, USD/JPY, and USD/GBP, traders’ most popular and stable options. This is because their economic conditions are similar. In turn, exchange rate differences are minimal.
Meanwhile, minor and exotic currency pairs are preferred by other traders. These include USD/THB, USD/AUD, GBP/AUD, and GBP/SGD. These can be riskier due to their higher tendencies to fluctuate. Yet, they may derive higher returns.
Like crypto, forex is also notorious for its level of risk and volatility. Although it adheres to government regulations, security and anonymity are maintained in the market.
As of today, its average global trading volume per day is over $6T.
Stock Basics
A stock, also called equity, is a form of investment representing the unit or fraction of ownership of the issuing company.
Stock units, also known as shares, give the owner or stockholder a right to the proportion of the company’s assets and earnings. These are equivalent to how many stocks they own. For example, if the company realizes a net income of $100,000 and issues 100,000 shares, the amount will be divided into the number of shares. So, each stockholder is entitled to $1 per share.
Investors may buy and sell stocks on various stock changes. Given this, stocks should conform to the Securities and Exchange Commission (SEC). This government agency protects individuals from fraudulent practices of companies and stock exchanges. Given this, the stock market has become the foundation of almost every trader’s investment portfolio.
As of September 2023, the global trading volume of the stock market is valued at $109T, with the US comprising 42.5% of the total value. The current market capitalization is now about thrice its value in 2003.
Key Differences
These are the differences to note before entering the stock and forex markets.
Comparison of Stocks and Forex
| Stocks | Forex | |
| Market Hours | The stock market is accessible only during trading hours. In most countries, trading hours run from 9:00AM to 4:00PM. It is only open during weekdays except on holidays.
A trader must stay tuned to market and economic news even during holidays and weekends. These may lead to a shift in market sentiments and stock prices in just a day. |
The Forex market is more accessible than the stock market.
Trading runs 24 hours, five days a week. It’s divided into four sessions—Sydney, Tokyo, London, and New York. These four major sessions have overlapping hours to ensure continuous forex trading.
Hence, it allows traders to make and modify their buy and sell positions in real-time. This is a crucial aspect, given the high volatility and sensitivity of the market to news and political and economic events worldwide. |
| Investment Types | Stocks are a portion of issuing companies’ assets and income. These come in the form of shares. Investors earn through dividends and buy selling stocks at a higher price. | Forex investments are fiat currencies, which represent their respective economies: US Dollar or USD for the US, Euro or EU for the European Union or EU, Sterling Pound or Great Britain Pound or GBP for the UK, Japanese Yen or JPY for Japan, and Australian Dollar or AUD for Australia. |
| Market Participants | Market participants can range from individual traders and retailers to public and private companies and even government agencies. | Forex also has a wide range of market groups. But, it concentrates on financial institutions and large groups. These are the retail traders, multinational corporations, banks, financial institutions, governments, and central banks. |
| Trading Platforms | Stock trading takes place on stock exchanges. Traders can buy and sell on these exchanges. | Forex trading happens through brokers’ platforms. Trading takes place by buying currencies in exchange for other currencies.
Also, price speculations are possible using derivatives, such as options and contracts. These allow traders to buy them without buying their underlying assets. |
| Influence | Stock prices may be affected by market sentiments, news, and current events. The demand for stocks can dictate their price. But other forces may affect stock prices depending on the industry.
For instance, banking, construction, property, freight, and logistics are highly sensitive to macroeconomic indicators, particularly inflation and interest rates.
KPIs, including sales, net income, cash, FCF, and book value, also affect price changes.
That is why it is essential to be familiar with various financial price metrics to assess the value of a stock. Price/Earnings (PE) Ratio, Price/Book Value (PB) Ratio, Price/Sales (PS) Ratio, and Price/Free Cash Flow (PFCF) Ratio are some examples. |
Forex prices are highly responsive to the macroeconomic conditions of currency pairs.
Comparisons of their respective inflation, interest rates, geopolitical disturbances, Balance of Payment (BoP), and economic performance are some primary indicators.
Given these, the market requires knowledge of financial concepts to better understand the factors affecting them.
Price speculations are more challenging than in the stock and cryptocurrency market. |
| Earnings | Stock traders earn by buying and selling stocks.
Observing price trends to time the perfect spot to buy and sell stocks can help generate instant earnings.
Dividends are another form of earnings, mainly for long-term investors and retirees. |
Buying and selling forex with exchange rate differences derives income. |
| Volatility | The stock market may be much more volatile than the bond market. But it is much less volatile than crypto and Forex markets.
Given their manageable volatility, price speculations are easier to do in the stock market.
Even so, the market had its fair share of crises driven by price volatility and speculations.
Infamous examples include the Wall Street Crash of 1929, the Black Monday in 1987, and the dot-com bubble in 2000, among others. |
Forex is notorious for its highly volatile nature.
Major currency pairs can have minimal price changes. But minor and exotic pairs may show huge price fluctuations. Economic changes, wars, and sudden banking decisions can influence volatility.
Take the Swiss Franc Shock in 2015 as an infamous example.
This unfortunate event put a lot of traders and brokers on the brink of bankruptcy. It happened when the Swiss National Bank abandoned its 1.20 Swiss Franc pegging to EUR.
On the same day, the Swiss Franc appreciated by 41%.
About $100M in losses were recorded, including the capital depletion of three forex brokers. Even the giant FXCM was not spared from this crisis. |
| Regulations | The stock market in every country is regulated by the Securities and Exchange Commission (SEC). | Forex trading is regulated by governments. |
Market Outlook
Here’s what to expect in the stock and forex market in FY24.
Stock market
The stock market has been hammered in the past two years, driven by skyrocketing inflation and interest rates. The softening demand across industries was also a primary contributor to the weaker performance of most stocks.
Even so, we should not discard its resilience over the years. The stock market has been through notable crises that sent its value crashing in a snap.
Yet, it has rebounded from one crisis to another. We can see it in the Sharpe Ratio of the primary US Stock Market indices, the S&P 500 (SPX) and the NASDAQ Composite (IXIC).
The image above shows a massive increase in the value of SPX and IXIC stocks from the Global Financial Crisis. The seventeen-year price trend shows that the value of SPX and IXIC increased by 254% and 543%, respectively.
This means that the stock market has coped with inflation over the years. Also, their standard deviations are higher than bonds but much lower than crypto and forex.
The stock market is poised to heat up and rebound as inflation continues to decelerate. The goal of cutting interest rates thrice this FY may further support the market rebound.
The expected improvement in publicly traded companies’ financial performance will positively impact their stock prices.
Forex market
Inflation deceleration and Fed rate cuts may increase investing confidence in the market. We can expect higher capital inflows in the Forex market. Also, the value of the US Dollar may appreciate against many other currencies as the global economy rebounds. It may be easier to speculate currency changes as macroeconomic conditions become more stable.
Which is better?
Doing technical analysis in the stock market can be simple with proper preparation and resource materials. However, it should work hand in hand with fundamental analysis (company financials, industry analysis, and macroeconomic changes) to support your speculations.
Price speculation in the Forex market is possible but requires more knowledge of economics. Also, traders should always watch two currencies and economies simultaneously.
