If you’re new to investing, you may assume that trading on the forex market and stocks is roughly the same thing. But there are major differences between forex trading and stock trading that you should be aware of.
These differences will affect the type of strategies you use and the amount of money you can expect to make. One option may also be better for you than the other depending on your trading style and expectations.
Let’s take a look at what differentiates forex trading from stocks.
The Forex Market Never Sleeps
Perhaps the biggest difference between the stock market and the foreign exchange market is that forex trading happens 24/7 while stock exchanges close and open at specific times.
There is also one single forex exchange while there are hundreds of stock exchanges.
This means that you can always make money on forex and capitalize from movement at any time of the day or night. This is especially beneficial for people who are trading currencies outside of the main six.
If you’re living in Kenya, for instance, and have a good knowledge of the Kenyan economy, then you could have a significant edge on trades and sniff out opportunities that no one else can see.
You do have to make sure that you work with a broker that gives you access to exotic pairs, however.
If you want to start forex trading in Kenya and are looking for a great brokerage platform, HFM is highly recommended.
When You Own a Stock, You Own a Piece of a Company
Another difference between currency trading and stocks is that when you buy a stock, you effectively become part owner of the company. But, when you buy currencies, you are banking on an economy without actually owning a part of it.
This will have a profound effect on how you approach trading. With stocks, you have to pay attention to things like market capitalization, debt, assets, acquisitions, etc.
With a currency, you have to look at things like GDP, central bank interest rate, trade deficits and surplus, etc. It’s a whole different set of data that you need to look for and evaluate.
It’s Easier to Start Trading on Forex
Trading stocks comes with many regulations that some people aren’t really aware of. Some people, for instance, assume that anyone can start day trading when, in reality, you need to meet very high funding requirements to start pattern day trading.
Someone is considered a pattern day trader when they make more than four trades within a five-business-day period. These people need to have at least $25,000 in the brokerage account and meet all sorts of other criteria to trade lawfully.
Anyone can trade on the Forex and there are no regulations on the number of trades that you can make.
You can make money on the down and up swings by shorting currencies just like on the stock market and you can use leverage, but forex brokers are allowed to offer up to 40:1 leverage while the leverage is capped at 4:1 on stocks.
These are all things you have to think about when choosing between both options.
So, which one is the best option for you? It all depends on how much money you have to start, how much risk you’re willing to take, and how fast/big you want your returns to be.
Your best bet would be to try both and ask people who’ve been in both circles about what they think.