Forex Vs. Stocks: An Introduction
Forex and stocks are two of the most popular investments out there. However, there are HUGE differences between them. It’s important that you understand the differences between the two before you start investing your money in either one.
What is Forex?
Forex is short for foreign exchange. When someone mentions Forex, they’re either referring to the global market for trading currencies or actual currencies. When you invest in Forex, what you’re doing is trading currency. You’re literally trading your United States Dollars (USD) in exchange for a different currency, such as the Euro (EUR). Essentially you’re buying one currency while at the same time also selling another.
What are Stocks?
Stocks represent small fractions of a company you can buy. When you buy a stock, what you’re doing is buying ownership. A stock represents a “share” of a company. So for example, if you were to buy one Amazon stock today, you’d own less than 0.000000001% of Amazon. The small decimal would represent your actual share.
Before you learn about the differences between Forex and stocks, it’ll be easier if you know their similarities first.
Image Source: The Street
The Similarities Between Forex and Stocks
- Currencies and stocks both have bid prices. These bid prices represent the current value of a currency or stock. For example, at the time of this writing one U.S. Dollar is worth slightly less than one Euro. Meanwhile one stock/share of Amazon is worth $1,179. (Prices are always determined by demand.)
- Unless someone else is doing it for you, both require LOTS of research. You can’t just invest in a currency or a stock because you like it, or because it’s currently (keyword currently) worth so much. Most Americans who invest in stocks and Forex don’t actually do the investing themselves. They have “financial advisors” who make those decisions for them. The average person is simply too busy working and living their life to invest their time into studying the markets.
- You’ll need an account. To trade Forex or invest in stock, you will need to setup an account with an authorized broker or investment partner. Usually this involves depositing money or linking a bank account. Examples of investment partners include Freeman Capital (Forex) and Scott Trade (Stocks). Investment partners are the ones who manage or put your trades through, similar to how the post office makes sure your mail is delivered.
Now that you know the similarities between Forex and Stocks, you can finally learn about their differences.
The Differences Between Investing in Forex and Stocks.
- You’re investing in different things. Forex involve trading currency. Stocks involve trading shares of a company.
- Commissions. Anytime you buy or sell a stock you must pay a flat $7 commission, regardless of whether you make a profit or take a loss. As far as Freeman Capital is concerned, if you don’t make a profit during that trading month you never have to pay us.
- Speed. When you buy or sell a stock, you have to wait for your broker to approve your transaction. With Forex, once you enter your trade it goes to the market for execution.
- Opportunity. Because Forex is a global market, you’re almost always able to trade it. The market is open 24 hours a day starting on Sunday at 5pm EST through Friday at 5pm. Stocks are bought and sold in stock exchanges, such as the New York Stock Exchange (NYSE). Most stock exchanges are only open Monday through Friday from 9:30AM to 4PM local time, as in the local time of the state/country the exchange is located in.
- Leverage. Leverage is basically how far your money can take you. In order to get leverage in the stock market, you will need to request a margin account with your broker. After you get approved, you’ll most likely be given 2 to 1 leverage, which means with a $1000 deposit, you can buy up to $2000 worth of stock. On the other hand, most Forex brokers will give you 50 to 1 leverage. This means with $1000, you can invest up to $50,000. And no I’m not joking.
- Research. Earlier I said stocks and Forex were alike in how they both require research before you invest your money. Well, with Forex you have to research two countries. With stocks you have to research industries and individual companies. You don’t want to trade for the currency of a politically unstable country, such as Syria. And you definitely don’t want to buy the stock of a company on the verge of bankruptcy.
Forex Vs. Stocks: Which is Better For You?
Investing requires your commitment, time and money. Whether you plan on investing in Forex or stocks, know that neither is “easy”. Don’t expect to get rich quick. If you choose to start investing on your own, you will need to dedicate some of your time each day to keeping an eye on the financial markets. (That means watching TV and reading articles on the internet related to what you’ve invested in/ want to invest in.)
However, you can also choose to let someone else do all that hard work for you, which is where a company like Freeman Capital can help you. If you choose to invest with Freeman, you’ll have more time to live your life, while they’ll be responsible for making you money.
Note: This post is only meant to be a quick introduction. Several books can be written based on the headline of this post alone. Only the most fundamental info has been included here.
Disclaimer: Trading foreign exchange on margin (leverage) carries a high level of risk, and may not be suitable for all investors. Past performance is not indicative of future results. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial professional if you have any doubts.