Forex and stock trading are two of Australia’s most popular forms of trading. Both offer investors the opportunity to make money from the movements of different asset prices, but there are some critical differences between the two that investors should know.
One difference between trading forex and stocks is leverage. Leverage is the use of borrowed money to increase your investment returns. In forex trading, you can use a leverage of up to 400:1, which means that for every $1 you have in your account, you can trade up to $400 worth of currency. This high degree of leverage gives you the potential to make large profits, but it also carries a high degree of risk because your losses are magnified. The maximum leverage you can use in stock trading is usually much lower.
Margin is how much money you put up as collateral to trade. In forex trading, you can trade on margin, meaning you only need to put up a small percentage of the total value of your trade. For example, if you’re trading on 200:1 leverage and want to buy $10,000 worth of currency, you would only need to put up $50 as collateral. It allows you to make large trades with a small amount of money. In stock trading, you usually have to pay the total value of your trade upfront.
Regarding order types, forex and stock trading differ in crucial ways. One key difference is that with forex trading, you can place what’s known as a limit order, which is an order to buy or sell a currency pair at a specific price. For instance, you may place a limit order to buy EUR/USD at 1.3500, which means you will only buy the currency pair if it reaches the 1.3500 level. With stock trading, you can only place market orders, which are orders to buy or sell a stock at the current market price.
Another difference between forex and stock trading relates to trading hours. The forex market is open 24 hours a day from Sunday evening to Friday night, which means you can trade whenever it suits you, regardless of your time zone. The stock market, on the other hand, has set trading hours. For example, the Australian Stock Exchange (ASX) is open from 10 am to 4 pm (AEST).
With forex trading, trades are generally settled two business days after the trade is made. So, if you make a trade on Monday, it will usually be settled on Wednesday. On the other hand, stock trades are usually settled three business days after the trade is made. So, if you make a trade on Monday, it will usually be settled on Thursday.
Stock trading generally has higher commissions than forex trading. For example, a typical commission for trading shares on the ASX might be $10 per trade, plus 0.1% of the value of the trade. So, if you buy stocks worth $10,000, your commission will be $10 + ($10,000 x 0.001), which equals $20. In contrast, a typical forex broker might charge a commission of $5 per trade, plus a spread of 2 pips. So, if you were buying EUR/USD and the spread was two pips, your total commission would be $5 + (2 pips x $10,000), which equals $25.
Another difference between forex and stock trading relates to regulation. The forex market is highly regulated by organisations like the Commodity Futures Trading Commission (CFTC) in the US and the Australian Securities and Investments Commission (ASIC). These organisations help to ensure that the forex market is fair and transparent. The stock market is also highly regulated, but not to the same extent as the forex market.
Lastly, liquidity is another crucial difference between forex and stock trading. Liquidity refers to how easy it is to buy and sell an asset. The forex market is the most liquid, so buying and selling currency pairs is straightforward. The stock market is also quite liquid, but not to the same extent as the forex market.