Most people think of fixed deposits and P2P products when it comes to financial management. When it comes to investments, most people think of businesses, residential buildings, and franchise stores. Consequently, when it comes to trading the financial markets, people often think of stocks, foreign exchange, cryptocurrency, and indices.
Financial management, investment skills and trading skills are not the same. The former two require significant funds and long-term holding patience; the latter requires high leverage and sharp trading skills.
The trading threshold in the financial markets is relatively low; anyone can enter the financial market and start trading. The risks associated with trading are immense; hence, without the right trading experiences and skills, it is difficult to thrive in this challenging industry. Beginners need to learn the different ways to trade when entering the financial markets. This article will compare the stocks and foreign exchange markets. Although it will not cover many trading skills, beginners must build an objective market perception.
Forex and stocks comparison
The essence of the foreign exchange market and the stock market is the same. The stock market trades shares distributed by listed companies and the foreign exchange market trades "shares" distributed by a country, but these shares are called currency. If you are optimistic about a listed company’s growth prospects, you can buy its stock. In contrast, if you are confident about a country’s economic potential, you can buy and hold its currency. Shares typically receive regular dividends, while currencies have steady interest income. Traders can check the economic calendar or market news to predict current and future market conditions.
Differences between Forex vs Stocks
There are some significant differences between stocks and forex. These differences seem to be the advantages of the foreign exchange market and the shortcomings of the stock market.
- Firstly, the A-share market does not allow short selling, which is a significant limitation as it prevents traders from profiting from falling stock prices in adverse market conditions. If there were a short-selling mechanism, the situation would be drastically different. Traders in the foreign exchange market can easily short-sell currency pairs to participate and profit from adverse news events or economic releases.
- In addition, the trading hours for the stocks and foreign exchange markets are vastly different. The A-shares market is only open 4 hours a day, while the Forex markets are open 24 hours a day. Responsibly speaking, you will not find trading opportunities in the markets throughout the 24 hours when they are open. Most trading opportunities are concentrated in the European and US markets, from 4:30 pm Beijing time to 4 am the following day, which is almost 12 hours. In any case, the trading time for the foreign exchange market is much longer than that of the stock market, which brings convenience to traders. Hence, traders do not have to worry about significant policies and news being announced when the Forex markets are closed like in the stock market.
Taking the stock market as an example, in 2015, the Ministry of Housing and Urban-Rural Development issued a new policy of 330, reducing the down payment ratio for a second home and lowering the ratio for provident fund loans. This was good news for A-share real estate companies, but if the information was released after 15:00, traders could not participate in the explosive market movement in time. They could only participate in the centralised bidding the next day, which does not favour retail investors.
Forex Risks & Drawbacks
Many of the advantages of the foreign exchange market over stocks have been mentioned above. However, the foreign exchange markets are not perfect either, as they also have some unique problems. The foreign exchange market allows for high leverage, which is associated with increased risk. High leverage can give traders a false sense of security so that they ignore existing market risks. Beginners can read the trading guidelines to start investing in the forex market to avoid unnecessary risks.