Forex Brokers for Dummies: Forex Brokers vs. Stock Brokers
Beginners in trading find it challenging when choosing between stocks and Forex. Some basic economics would help to solve the puzzle. We live in a setting where the rate of interest is relatively reduced.
National reserve banks across the world are experiencing little growth. For a long period, the loose fiscal strategy has been their primary relief. Going back to the basics, saving your money in banks won’t be so helpful to you. In most established countries, the income you can earn from savings is way below the inflation.
Therefore, people are always looking for better alternatives where they can invest their money (read this review of Octafx). They usually go for stocks and Forex, which are well established fiscal markets. This article will help you understand even the slightest difference between stock and Forex.
Comparison of the Forex and Stock Market
You won’t get a hard or a quick answer to the query better among the two. Each market has its benefits and downsides if you are to make a comparison. It narrows down to how crucial those features impact you at a personal level.
Forex is a decentralized market. It is a representation of a setup of participants in the world who practices trade. Major accomplices in this sector include central depositories, commercial companies, and hedge reserves.
The stock market stands for a combination of sellers and buyers of stocks or shares. Shares give you a proportion in possession of the company. The transactions at times occur through stock exchanges. As a method of raising funds, most companies decide to sell their shares.
The stock exchange offers a transparent, regulated, and suitable marketplace where buyers carry out their businesses with the sellers. The stock market is famous, but the Forex market exceeds its size. If you weigh the two in terms of size, the Foreign exchange market automatically carries the day. But is the size important in any way? Yes, the liquidity is as great as its size.
Stocks and Forex trading occur under the regulation of different agencies. In the United States, securities and Exchange regulates the equity and stock options.
On the other hand, Forex trading is under the Commodities Futures and Trading Commission, a government agency. Besides, there is also the National Futures Association, which is a non-profit organization.
The scope of focus
The scope of investor focus is another significant difference between stocks and Forex. When you look at an individual share, you find yourself focusing on a narrow range of variables. Although you may find yourself checking the wider trends, factors that directly affect the company are more important. Critical narrow metrics include the company’s cash flows, debt levels, etc.
On the other hand, there is a wider focus on Forex. A currency is a reflection of how the general economy performs. Therefore, investors have more interest in the larger economy. There is more focus on general indicators such as inflation, GDP, and unemployment instead of private businesses’ performance.
Trading Forex involves two legal tenders at the same time. Investors sell one while purchasing the other. Therefore, a person who trades through fundamental analysis considers how the concerned economies perform. However, you may leave the fundamentals and solely focus on technical analysis.
The Forex market is accessible throughout the day. Besides, participants come from all over the world. Most of the market faces a limitation on trading a listed stock. If you are a stock trader, you have to observe the stock exchange hours. However, some exchanges have come up with some form of prolonged trading hours. Therefore, the traders can still participate before and after the trading periods.
Forex trading has more overwhelming leverage than stock trading. It makes FX trading both lucrative and risky. In the United States, Forex trading has a leverage of 50:1. It determines the value of the foreign currency that should be present in your account.
In such a case, you need 2% of it. On the other hand, the ratio common for stock markets is 2:1. Therefore, the investors must have 50 percent of the value of stocks they are dealing with present as cash in their account.
Comparison of the Liquidity
The Foreign Exchange market has high liquidity. The reason behind the characteristics is a large number of participants who execute their trades round the clock. Besides, major and famous stocks usually have great liquidity, e.g., Microsoft. However, the liquidity of the stocks lowers as you go far from the blue chips.
Reasons why liquidity is relevant
The important role of liquidity is the convenience it poses when executing a trade on an asset. It leads to lower transaction costs and tighter spreads. Let us understand it using an actual example, where we take Microsoft share and a EUR/USD pair. To trade the share, you have to cater for a commission and spread.
First, take Microsoft’s share price at an average of $52. The company’s spread range could be on the range of 2-5 cents on standard market conditions. That range is approximately between 0.04% and 0.09%. Note that it differs from the brokers. However, you may have to give as high as ten cents for a single share. You pay the commission when you open and close a trade.
Now take the EUR/USD currency pair. Most of the time, retail foreign exchange trades involve the use of spreads without commission. It also happens to be the mode of function in the Meta Trader 4 platform. You can pay one pip with such an account when trading EUR/USD without commission.
Take the price of the pair at 1.1190. It means a circulation from 0.0001 to one and finally at 1.1190. The figure lies below 0.01%. When you compare the stock and Forex market, the scenario indicates that the Foreign Exchange carries the day. The spread in the foreign Exchange differs from that in the stock market. Moreover, the cost efficiency goes down when you bring the issue of commission.
So far, which would you choose between stocks and Forex? When it comes to trading, it is good that you concentrate on what works best for your case. It is better to stick to what you know best. In case you have strong interests in individual firms, it is not a bad idea to trade stocks. If you prefer macroeconomics, then Forex will be more suitable for you.