The stock market and the foreign exchange (forex) market are two of the most popular financial markets in the investment world. Investments in both markets are quite profitable but have a high enough risk. In that case, find out more about both of them here. The trading mechanism in the forex and stock markets is almost the same. However, there are some significant differences between the two.
Well, here are some differences between the stock market and the forex market:
In the stock market, the traded instrument is proof of ownership of a company or limited liability company. There are hundreds of companies listed on a stock exchange where shares can be traded.
Meanwhile, in the forex or foreign exchange market, the instruments traded are the currencies of countries in the world. Forex instruments are generally traded in pairs, such as the euro against the pound (EUR / GBP), the euro against the United States dollar (EUR / USD), the pound against the United States dollar (GBP / USD), and others.
The stock market usually only operates from morning to evening. The opening and closing hours of stock exchanges in each country of course vary. Meanwhile, the forex market trading hours last 24 hours nonstop from Monday to Friday. This is because forex is traded around the world which has a time difference.
In the forex market, there is a term of leverage that allows a person to make transactions with a capital that is smaller than the actual capital.
Generally, leverage in forex is displayed in a certain proportion, for example, 1: 100 to 1: 1,000. For example, 1: 100 leverage means that if you want to make transactions worth the US $ 10,000, you only need to spend the US $ 100 in the capital.
The difference in transaction funds from the capital is considered as loan funds from brokers for traders. This loan is not subject to interest and cannot be withdrawn, it is only used for trading. Loans can be obtained after traders deposit capital as margin (the amount of money that must be in the account balance).
The forex market is the most liquid financial market compared to others because of its very large capitalization. There are always enough funds on the market so that all sellers can easily find buyers.
Meanwhile, liquidity in the stock market is highly dependent on the popularity and capitalization of the shares purchased. Large, popular stocks or blue chips will be easier to sell. However, when buying third-tier stocks or small-cap stocks, it can be difficult to sell them back.
Transactions in the stock market occur only in one direction, namely starting with buying shares and selling them after waiting for some time. The difference between the purchase price and the selling price is either a profit or a loss. Therefore, the opportunity for profit or profit in the stock market can only be obtained when prices move up.
Meanwhile, in the forex market there is the term two-way opportunity, that is, you can still look for profit opportunities, both when prices move up or down. This happens because in the forex market trading allows two-way transactions.
When you expect the price to move upward, you can take a Buy (long) position to seek profit. Conversely, when prices are down, you can sell (short) to make a profit.
Volatility and risk
The volatility of the forex market is very high, meaning that prices can go up quickly and can suddenly drop quickly. This is because the forex market is very sensitive to the political, economic, and social events of a country.
Meanwhile, the price patterns in the stock market tend to be more stable which can be traced over time.
The higher the volatility, the higher the profits. However, keep in mind that the risk will also be higher.