Many misconceptions about the fundamental difference between trading in stocks (also known as equities) and foreign exchange (forex) exist.
The most apparent distinction is that stocks give you partial ownership of a company while forex does not provide any stake in the company whose product or service you are buying.
Buy low and sell high
However, both stock and forex traders can buy low and sell high. So ultimately, the difference lies in the fact that stock trading generally requires more time and effort than forex trading because it can take weeks for assets to appreciate enough to be traded profitably while currency values change every day.
Stock investors typically buy into companies they believe will increase value over time. Stock traders hope to buy low and sell high after the price appreciation is large enough for them to make a profit.
Timelines on investments
Stocks are generally more difficult to trade than forex because of their longer timelines; stores can take several years before they provide enough return on investment (ROI) for traders to make a profit.
On the other hand, Forex trading requires only short-term commitment—a trader closes his position with an equal number of longs and shorts within one day—and makes money based solely on changes in currency values rather than actual share ownership.
The forex market works around the clock every day except during weekends when it is closed from Friday night through Sunday afternoon.
Trading hours are dictated by the countries’ time zones whose currencies are traded.
While there are substantial differences between stocks and forex, an individual trader will have to decide which one is more suitable according to his circumstances.
To know or not to know
Stock trading requires research into specific companies’ products or services, business models, profitability, manufacturing costs, etc.
In contrast, forex traders do not need to know any specifics about the company whose product they are buying.
Individuals who prefer speedy trades can choose forex, while those who want a long-term investment in a single company should opt for stocks.
The risks involved in both types of investing are high, but at least with stocks, you’re putting your own money on the line rather than exposing yourself to unlimited risk.
How much money do you need?
Forex requires a lower cash outlay than stock investing because all you need is an online account with a broker who has access to the forex market.
No purchase of shares or other assets is necessary unless you plan to trade them independently outside of your online brokerage account.
Stocks usually require an initial investment between $500 and $5,000, depending on which ones you choose to buy into.
However, some companies have special offers for new customers requiring as little as a $100 deposit (and markets like the UK Stock Market have no minimum deposit requirement).
Forex trading does not track a company’s performance or its stock price movements. This means that you can take part in forex trading without thinking about how your investments are performing over time because currency values change every day based solely on demand and supply.
On the other hand, stocks are generally more difficult to trade (profitably) unless you are an expert analyst who knows which ones are likely to appreciate over short periods.
Licenses and taxes
Forex traders do not need any special licenses beyond their trading account with a broker, while those who wish to buy stocks require investment licenses depending on which ones they plan to invest in.
For example, if someone intends to invest in gold futures, he needs a permit from the U.S. Commodity Futures Trading Commission (CFTC) and a registered commodity trading advisor (CTA).
Stock traders need licenses from the Security Exchange Commission to deal with stocks, bonds and other investment vehicles that are not covered under exchange-traded funds or options.
Stock investors have to pay taxes on their capital gains and dividends earned.
In contrast, forex traders can trade anonymously without any tax liabilities as long as they do not transfer money into or out of their country of residence – all you need is a foreign bank account and debit card.
Link to a Saxo broker for more information.