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    The Differences Between Forex and Stock Trading

    So you want to start trading – but are you better off choosing Forex trading or stock trading? We’ve created this easy-to-understand guide to Forex trading vs online stock trading for beginners to help you decide.

    Forex trading vs stock trading at a glance

    Forex is a type of Contract For Difference (CFD) trading that enables you to speculate on the rising or falling prices of global currencies. In a Forex trade, you buy one currency and sell another at the same time.

    The buy/sell decision in Forex is the same as the basic principle underpinning the share market. If you believe that a company’s share price will rise (or the currency will strengthen), you would buy. If you believe that the share price will fall (or the currency will weaken), you would sell.

    Stock trading, on the other hand, refers to buying and selling shares on the stock market. Making a stock trade essentially means that you own a small sliver of a large company pie. When you issue a market order to purchase stocks, you are agreeing to purchase the stock at the price available when the order is executed.

    Differences between Forex trading and stock trading

    Here are some of the key differences when it comes to trading Forex vs stocks:

     

    Forex

    Stocks

    Market accessibility

    Access to the market 24 hours a day, 5 days a week.

    Exchange markets operate to local open hours.

    Potential returns

    Large potential gains and losses from fast-moving currency fluctuations.

    May provide relatively stable returns over the long term if choosing blue-chips, or more risky returns depending on your shares.

    Leverage

    You can get up to 400:1 leverage with ForexCT, requiring a minimum $500 deposit to trade.  

    You will need to put the cash in to get its equal value in shares, unless you have a margin loan.

    Who is it for?

    Usually suits those looking for short-term growth who can monitor fluctuations.

    Usually best suited to long-term or set-and-forget traders.

    Complexity

    Forex volume is usually centred around eight major currency pairs

    Can be complex to manage and monitor, with over 2,200 listed companies typically listed in the ASX alone.

    Risk

    Your losses can exceed your deposited funds if the right measures are not in place.

    You could potentially lose all of your deposited funds in the case of a stock crash or financial crisis.

    Risk mitigation

    Stop losses, diversification and other risk management options.

    Stop loss orders, put and call options and diversification.

    Potential pros and cons of Forex trading:

    - Leverage: With Forex trading, you can achieve up to 400:1 leverage (i.e. 400 times your initial deposit) by depositing as little as $500. However, leverage can also magnify losses without the right risk management strategy, such as implementing stop losses.

    - 24-hour market access: The CFD market is open for trading 24 hours a day from Monday to Friday, which gives you the ability to react to fluctuations in the currency market at any time.

    - You can make a profit in a bear market: In a bear market, the chance of losses is usually greater because prices are continually losing value. However, in forex trading, you can go short on a currency pair as easily as you can go long without needing to make any additional precautionary trades to limit losses.

    - Greater freedom: Forex trading tends to have fewer regulations and limits than major stock exchanges, which you may find appealing.

    Potential pros and cons of stock trading

    - Relatively stable returns: Although leverage is lower with stock trading, returns may be more stable over the long term if choosing blue-chip companies.

    - Less monitoring needed: Depending on the type of shares chosen, you may only need to spend a minimal amount of time monitoring the market.

    - Limited market access: Exchange markets, including the ASX, operate to local open hours – meaning trading opportunities are limited.

    - More cash needed initially: Because of lower leverage in stock trading, you will need to put the cash in to get its equal value in shares.

    Interested in learning more about Forex trading? Get a comprehensive and easy-to-understand overview of the basics with our Forex trading eBook.