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Currency Pairs and Stocks: A Comparative Analysis


Written by Sandro Pontedra  Finance Industry Expert Sandro Pontedra

Currency pairs and stocks are the most popular assets for day trading, long-term, and medium-term investing. The daily turnover volume on Forex exceeds $5 trillion. The total market capitalization of all global stocks is over $63 trillion. Let's compare the forex market and the stock market to determine which is more interesting for trading.

What is Forex?

The concept of Forex is fairly straightforward, as it's based on determining the price dynamics of a currency pair. For instance, if you're traveling from Japan to the United States and have 100,000 JPY with an exchange rate of 144.91, you'd receive $690. Upon returning to Japan, if the exchange rate has risen to 150, and you still have $690, your total funds in yen would be 103,500. Thus, your profit would be 3,500 yen. Forex trading aims to capitalize on larger scale currency price movements.

What are stocks?

Stocks represent small shares of publicly traded companies. When you buy a share, you become an owner of a fraction of that company, which means you can claim a portion of the company's profits. If you're buying not the stock itself but a contract for the stock (for example, a Contract for Difference or CFD), you don't actually own a portion of the shareholder's equity. However, you have the right to profit from the stock's price dynamics. This is especially attractive to traders who don't hold onto stocks for long periods and are interested in profiting from short-term price fluctuations.

Forex or Stocks?

Currencies are traded in pairs – EUR/USD, GBP/USD, USD/JPY, etc. The idea is that you need to exchange one currency for another. You either buy or sell one currency against another. There are hundreds of currency pairs available for trading. These pairs are categorized into major, minor, and exotic pairs. Major pairs involve currencies of developed countries and always include the US dollar, e.g., EUR/USD and USD/JPY. Minor pairs consist of developed countries' currencies without the US dollar, like EUR/GBP and AUD/GBP. Exotic pairs involve currencies of developing countries paired with those from developed nations, examples being USD/TRY and EUR/ZAR.

A Deep Dive into the Dynamics of Forex and Stock Trading

The realm of trading is vast, with the FOREX (foreign exchange) market and the stock market being two of its prominent pillars. Here's an insightful look at the intricacies of both these markets, exploring their liquidity, trading hours, and profit opportunities.

Trading Volumes: Forex Vs. Stocks

The daily trading volume of currency pairs on FOREX is a staggering $5 trillion, reflecting the global nature and importance of this market. In contrast, when considering stocks, their sheer variety is overwhelming. In the U.S. alone, more than 6,000 stocks are traded, with giants like Apple, Microsoft, and Amazon leading in terms of capitalization. On a global scale, the number of stocks exceeds 10,000. However, despite this extensive variety, the daily trading volume for stocks worldwide approximates $1 trillion, a figure that can be volatile and subject to market dynamics.

Liquidity Matters

Liquidity is an integral factor for traders because it determines how easily they can enter and exit trades. Both the forex and stock markets are characterized by high liquidity in general. However, this doesn't imply uniform liquidity across all assets. On the FOREX market, while major currency pairs enjoy high liquidity, some exotic pairs like TRY/ZAR or BRL/MXN might be less liquid. This reduced liquidity can make such pairs more costly and less favorable for trading. Similarly, in the stock market, while blue-chip stocks might enjoy robust liquidity, lesser-known or smaller stocks might face liquidity challenges.

Trading Hours: Round-the-Clock Vs. Business Hours

Another significant distinction between forex and stocks lies in their operational hours. The forex market, being truly global, operates 24 hours a day, five days a week. It starts on Sunday evening and concludes on Friday night, catering to traders from various time zones. Stocks, on the other hand, have more restricted trading hours. For instance, in the U.S., the regular trading session commences at 9:30 AM and concludes at 4:00 PM.

Earning Opportunities: Beyond Price Differences

At a fundamental level, both forex and stocks offer earning potential through price differences. But stocks present an additional avenue for profits—dividends. Dividends are portions of a company's profit shared among its shareholders. This aspect is particularly relevant for investors engaging directly in local stock markets and not via derivative instruments. However, it's worth noting that dividends might not be a primary concern for day traders and scalpers who primarily focus on short-term price fluctuations.

In conclusion, both forex and stocks have their unique characteristics and advantages. Deciding on which avenue to explore depends on an individual trader's strategy, risk appetite, and market understanding. However, having a grasp of the nuances of each market aids in making more informed decisions.

What Affects Prices of Forex and Stocks?

Both markets are subject to a vast array of factors. For currencies, some of the primary driving factors include economic data such as inflation, employment, and production indicators. The key triggers for currency rate dynamics are decisions on interest rates by central banks, such as the Federal Reserve System, the Bank of England, and the European Central Bank (ECB). Some currencies also depend on prices of essential commodities like oil or gas.

Stocks, too, are influenced by a multitude of catalysts – corporate earnings, activity in the mergers and acquisitions (M&A) segment, monetary and fiscal policies of economies, as well as news related to specific companies.

Regulation: Forex and Stocks?

Both markets are comprehensively and stringently regulated. For instance, in the U.S., the stock market is overseen by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). In the UK, the Financial Conduct Authority (FCA) takes charge, whereas in Europe, it's the European Securities and Markets Authority (ESMA). Other regulators include the Australian Securities and Investments Commission (ASIC), the Cyprus Securities and Exchange Commission (CySEC), among others.

AMarkets is one of the first companies to have been granted an 'A' category membership in the Self-Regulatory Organization in the financial markets – The Financial Commission.

This regulator deals with disputes between clients and brokerage firms that are members of The Financial Commission. Trading with AMarkets is both profitable and reliable. Besides safety, we offer a nearly unique service in the brokerage market, wherein every client receives the highest quality, in-depth, and timely support at every stage. We don't prioritize based on your deposit amount or turnovers. Interested in trying? The Forex market is more regulated than the stock market in certain countries.

What's Common Between Forex and the Stock Market?

Shared Catalysts: Both markets have shared catalysts. For instance, both assets are influenced by monetary and fiscal policies. Monetary policy pertains to the actions of central banks, while fiscal refers to the economic-political activities of governments. For example, the U.S. dollar and stocks react differently to the Federal Reserve's interest rate hikes and cuts. The U.S. dollar generally rises when the Fed hikes rates, while stocks typically dip. Conversely, the U.S. dollar often drops when a large fiscal stimulus package is adopted.

Trading Strategies: The trading approaches are similar for both markets – scalping, medium-term trading, technical and fundamental analysis.

In Conclusion...

Which is more profitable for a trader – Forex or stocks? You can earn on both markets. Consider what resonates more with you, what's clearer, and what you're more passionate about. And it's worth repeating, as it's genuinely crucial: A critical aspect is to start trading with the most trustworthy guide who won't let you down. Choose reliable brokers with a strong track record in the market. And perhaps the most critically important criterion for beginners is the level of care and attention.

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