What are the Main Differences between Stocks and Forex?

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Take a quick search online for the best things to invest on in 2019. On a good list, stocks and forex will appear somewhere in the top 10 investments. Futures and more recently cryptocurrencies are often compared to stocks and foreign exchange.

What are stocks and what is forex trading? Which is better and where should you invest? Find answers to these questions and more in the article below.

What are Stocks?

Stocks are a collection of shares and what defines the economic value of a company. The shares gain value as the company grows and lose value if it stops making profits and becomes bankrupt. Stocks are sold by company owners and shareholders based on the value of the company.

For many companies, the process of selling shares begins with the goals of raising capital. Let’s say a company requires $1 million to develop products and market them. They could arrange an initial coin offering and sell 30% of its value as shares to investors.

If the company is valued at $3 million, about $1 million worth of shares will be sold out. The company could divide the one million into a million shares, each valued at $1 or use a different formula. Once the company becomes publicly listed, anyone can buy its shares as stocks.

Some companies choose not to go public and instead sell their shares to private entities through boardroom meetings. If you are interested in buying stocks on the New York Stocks Exchange, you’ll be buying shares to publicly traded companies.

What is Forex?

Forex is short for foreign exchange. Forex trading is the business of buying currencies when their value is low and selling them when they go up. In Forex markets, currencies are separated into pairs for comparison reasons. The US dollar may be paired with the Euro. The Japanese Yen gets paired with the British Pound.

Like stocks, currencies gain and lose value all the time. It mostly occurs in terms of cents, which is probably why few travelers care about the exact amounts they get for trading their currencies. The value of currencies follows the law of supply and demand. When there is more demand for euros than pounds, pounds lose value while euros gain.

Differences

#1 Trading Volumes

Forex dwarfs stock trading any day of the week. While stocks trading is valued at $200 billion per day, the currency trading industry is worth $5 trillion a day. Surprisingly, most of the pairings done on forex trading sites involve major currencies alone. That includes EUR/USD, AUD/USD, JPY/USD and GBP/USD.

Having high volumes brings many benefits to traders. For one, their trades get executed instantly at the exact price the currencies are valued. The $200 billion stocks trading volume is certainly high as well. So, you shouldn’t worry about not finding liquid markets with your trades.

#2 Trading Times

FOREX has a trading schedule that starts Monday morning and ends Friday midnight. Trading is done through inter-bank markets to ensure that time zones don’t affect the trading times. If you are interested in forex, you are open to trading at any time of the day during all business days.

By contrast, stocks trading is mostly done through brokers. You can’t walk at the NYSE offices and pay to get a share of Amazon stocks. Instead, brokerage firms buy stocks in New York or at the London Stocks Exchange on their clients’ behalf.

Many brokerage firms buy stocks in bulks and sell them to customers around the world online. As a buyer, you simply create an account on the site and buy stocks for whichever company that is supported.

Keep in mind that you can lose money in both stocks and forex. Since the prices are influenced by supply and demand, there is no guarantee of making profits all the time. The best you can do is to research about top currencies. Keep up with news and signals to anticipate prices to go up or down.

They help you avoid making rushed decisions and instead make fact-based trading decisions. In the process, you get to limit your losses and increase profits.

#3 Cost of Trading

Stocks have prices that begin with pennies and go as high as $300,000 apiece. That’s right. If you want some stocks, like Warren Buffet’s Berkshire Hathaway stocks, you have to part with at least $315,000. Of course, Buffet is the king of stocks trading one of the richest men in the world for decades.

Comparatively, you can start your forex trading journey with as low as $10. If you want to be a professional, you will probably start with a higher amount. $1,000 is a good starting point for many traders – but it’s not an official rule.

If you don’t have a lot of capital, forex trading comes with tools that let you magnify your profits but also increases your risks. Often called leverage, the broker gives you up to 100 times the amount of money in your account for you to trade.

Let’s say you have $1,000 in your account. If a broker gives you leverage of 1:100, your $1000 is multiplied by 100. As such, you now have $100,000 to work with. Brokers afford to give you such huge sums because currencies only lose value in cents. Again, you also lose some your trading capital for losses associated with your trades – often higher than what you would lose without leverage.

To Conclude

Stocks and forex are two of the main investment ideas you should think about in 2019. However, they are not the same. Stocks involve buying shares from companies and selling them for profit. Forex involves buying one currency using another and selling it afterward for profit.

Despite their differences, they both involve speculating price movements. If you believe the South African Rand is about to gain value because oil was discovered there, buy it. If it goes ahead and earns value, sell it for profit. The same applies to stock. Again, both require that you diversify your investment and spend some time researching to be able to anticipate price movements correctly.

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