Forex Vs Stock Markets Worldwide
Worldwide, foreign exchange markets both spot and futures are one the most active and popular investment choice for active investors. Many even compare the Forex and stock markets to figure out where to devote their time the best.
While many experienced investors prefer the forex market they will never rule out the stocks. In the end, it all comes to the risk profile of the investor. As you will notice, forex markets could be riskier than stocks but also, more rewarding. Even then the stocks are great long-term wealth builders and you will possibly reinvest your forex income into stocks.
Understand the differences, advantages and disadvantages of forex & stock markets will clear their risk-return profile.
Global stock market and currency market volumes are far apart. The forex market oversees a trading volume of more than $6 trillion per day. This is further targeted on a few key pairs like EUR/USD, AUD/USD, GBP/USD and USD/JPY.
On the other side, global stock markets generated about $0.5 trillion daily turnovers. However, this would only include publicly trades securities. Which means, the multimillion-dollar corporate mergers and acquisitions do not count.
With a huge trading volume, Forex has several for the traders when compared to the stocks.
With higher volume comes the higher liquidity. This is true for Forex as it is known to have higher liquidity giving tighter spreads with less amount of transaction fees. While on the other side, the shares have lower spreads with higher transaction costs when we compare with stocks.
The stock market faces variable volumes in different stocks. Few stocks, especially the large companies attract far more volume than the smaller ones. Thinly traded stocks could be very difficult to liquidate through the market.
24 Hour Markets
Spot forex markets are active 24×7. However, trading hours are limited to five days a week except for public holidays based on the local time. But, since the forex market is not limited to a country, it is operational in one or the other corner of the world at any given point in time.
Equity markets are more localized to the specific country or economic zone. Only select few stocks may trade in multiple exchanges across the globe.
The Transaction Costs
Forex transactions involve a spread between the buy and sell price of the currency. The spread, also called the bid-ask spread, makes up for all the transaction costs and exchange fees. The spread also varies based on the volume of trades in the currency pair. The higher the trade volume the lower the spread.
For the stocks, however, the brokers may charge a fixed percentage as commission or fee and country’s security transaction tax would apply on this fee.
For example, if you want to invest in equity shares worth $ 20,000, and your commission charge is 2% you will need to spend an additional $ 400 + taxes.
Majority of the forex trade across the world occurs in eight major currency pairs. Meaning the majority of the volume is concentrated within eight major currency pairs worldwide. Eight currencies are easier to track and that is why currency markets are popular among day traders and hedge funds.
The equity stock universe, on the other hand, deals with thousands of listed firms within each country. Making the task of picking a promising equity share a task akin to finding a needle in a haystack. Thus, equity markets find better takers among long-term investors.
Forex Vs. Shares – Risk & Rewards
There is no straightforward reply to the question as to which one is better to invest. While comparing the two, both of these can have their own pros and cons and we have already seen in the above paragraphs. It will depend upon the individual choice and capacity of any trader willing to invest in forex or shares.
At one end when we can have big players like investment banks, hedge funds, commercial companies and central banks more active in Forex, the stocks on the other side can accommodate everyone like individual traders and even the newbies. Both forex and shares have their own benefits and risks, which are to be calculated first by the traders before heading to invest in either of them.