Although two of the most commonly heard of trade markets, the stock and forex trading markets are vastly different. Yes, both of these are highly profitable financial markets and there are expert traders who invest and reap profits in both of them,but to the average newcomer, the decision on whether to start on the forex or stock market is a major one, and of utmost significance. This is because the strategies and techniques used in forex and stock markets are very distinct.
Buying & Selling Simultaneously
The most noticeable difference between forex trading and stock trading is the fundamental way it is traded. In forex, when one currency is being sold, another one is simultaneously bought. In stock trading however, only one of these takes place at a time. You either buy a certain amount of stock from a company, or a certain amount of stock is sold, but not at the same time.
Stock trading requires a large initial capital or investment compared to the capital required in forex. In stock trading, the capital a person has to invest depends on the price of the stock they are willing to buy, whereas in the forex market, your capital is the amount of money you are prepared to lose. The amount of capital a person invests in a forex trade directly affects the profits and losses from it, whereas the profit and loss from a stock trade is dictated by the market forces at the time of the time.
Stock is traded at stock exchange markets, like the New York Stock Exchange (NYSE), London Stock Exchange (LSE), etc. There are order books that keep records of the stock being sold and bought. In short, the safest way to trade stock is by using stock exchanges. However, such a privilege is absent in the forex market, because all the buying and selling is done over the counter. This means that there is no centralised market for foreign exchange. The main disadvantage of this is that the risk of a counterparty default is quite large.
Spread in a financial market refers to the difference between bid and ask price of the commodity being traded. The spread for stock is comparatively smaller compared to forex. Although some companies like Apple have tight spreads, it is treated as the exception and not as rule. Currencies like JPY, GBP, USD, EUR, CAD etc. have tight spreads because of the volume they share in the market. In short, in the long term, spread is comparatively cheaper compared to trading stocks.
Speculation and Investment
While the stock market can be a good investment, speculating on it is rather unwise. This is because the capital required for stock is quite large compared to forex. In forex, the capital is smaller and therefore due to the high liquidity pool, it is better to speculate in forex as compared to stock.