The foreign exchange market and stock market are two of the most popular to trade due to their volume, volatility and range of markets available. Discover which is best for you here.
Forex trading vs stock trading in summary
You can trade a range of financial assets including stocks and forex. While both are popular with traders, your choice will largely depend on what style of trading you use, your personality type, and the level of experience you have.
Let’s take a quick look at what each market is.
Forex market overview
The forex market, short for foreign exchange, is the largest and most liquid financial market in the world. It’s a marketplace for the transfer of one currency into another, through the buying and selling of currency pairs.
There is a huge range of major, minor and exotic currency pairs to trade. The most popular currency pairs include EUR/USD, GBP/USD and USD/JPY.
Learn more about forex trading.
Stock market overview
The stock market is the marketplace for the buying and selling of company shares. While the stock market is used to talk about shares on a broader level, it’s actually divided into exchanges. For example, the New York Stock Exchange, the London Stock Exchange and Frankfurt Stock Exchange.
There are thousands of shares to choose from across global exchanges, but the most popular tend to be blue-chip stocks or companies with a large market capitalisation, such as Tesla, Apple and Amazon.
Learn more about share trading.
What is the difference between forex and stocks?
There are a lot of differences between forex and stocks, including:
- Range of markets
- Market hours
- Volume, liquidity and volatility
- Price drivers
Range of markets
The stock market has a much larger range of tradable instruments than the forex market. In the first half of 2022, it was estimated that there are more than 59,200 listed companies.
These are spread across industries such as technology, pharmaceutical and mining stocks. The companies range in size too, so you can invest in large-cap stocks – such as Microsoft and Apple – right down to the smallest penny stocks.
With forex, there are hundreds of currency pairs in existence but not all of them can be traded. Although there are fewer choices, this means that volume is more concentrated – something we’ll look at more later – so the smaller number of markets available isn’t necessarily seen as a drawback.
The majority of trade is focused on the seven major pairs:
- EUR/USD – the euro vs the US dollar
- USD/JPY – the US dollar vs the Japanese yen
- GBP/USD – British pound sterling vs the US dollar
- AUD/USD – the Australian dollar vs the US dollar
- NZD/USD – the New Zealand dollar and the US dollar
- USD/CHF – the US dollar vs the Swiss franc
- USD/CAD – the US dollar vs the Canadian dollar
Those that prefer forex would say that seven major pairs are much easier to keep an eye on than thousands of stocks. But stock traders would argue that you only need to choose a handful of companies you’re interested in or, if you do want a broader exposure, you can use an index.
Learn about indices trading.
Market hours for the forex market and the stock market differ heavily. The forex market is open 24 hours a day, 5 days a week, while the stock market only operates while the specific exchange is open.
Although on their own, the opening hours of a market might not change your opinion on which market to trade, they can have a significant influence over your strategy – and especially the amount of time you’ll be spending monitoring the markets.
As it’s a decentralised, global market, forex trades around the clock over four sessions: Sydney, Tokyo, London and New York. This is one of the advantages of forex trading over stocks, but also one of the biggest risks. The forex market is constantly moving, which makes it important to create a risk management strategy with appropriate stops and limits to protect your trades while you sleep.
Learn more about forex market hours.
Shares market hours are different. There is a set daily timetable for stock market trading hours, depending on the specific region and exchange.
Take a look at the stock market opening and closing times for different regions all over the world:
Trading hours (local time)
08:00 to 16:30
09.30 to 16:00
08:00 to 20:00
09:00 to 16:00
Australia and New Zealand
10:00 to 16:45
09.30 to 17:00
Learn more about shares market hours.
Volume, liquidity and volatility
Volume, liquidity and volatility are all very common arguments in the forex vs stocks debate. But they’re all closely linked, so we’ll cover them together.
- Volatility refers to how much a market fluctuates in a given timeframe
- Liquidity refers to how easily an asset can be bought and sold without impacting its price
- Volume refers to how many active market participants there currently are
The forex market has significantly more volatility, liquidity and volume than the stock market. In fact, the forex market is the most traded market in the world with over $6 trillion in daily turnover. But as we’ve already seen, this volume is concentrated over just a few pairs.
Learn about forex market volume
The FX market remains a popular choice for short-term traders because most strategies are based on opening and closing multiple positions quickly, holding them for a short period of time with the aim of profiting from small price movements when the market is experiencing volatility.
It’s also important to note that while volatility can create opportunity, it also creates greater risk of loss if the trade is unsuccessful.
The stock market is generally considered less volatile than the forex market, but it can see periods of sharp market movements in response to earnings, politics and other market drivers. It sees fewer trades per day, but most stocks are still easy to access and trade. The larger, more popular stocks – such as Apple, Microsoft or Facebook – are the most liquid due to the higher volume of willing buyers and sellers.
But this is true for FX pairs too. The major pairs have the high volume, but once you move away and into exotic currency pairs, they can be as difficult to trade as small-cap stocks.
Learn about volume.
The final factor we’ll in the forex vs shares debate is what moves each market price. At a basic level, both forex and shares are influenced by supply and demand, but let’s look at that in more detail.
For shares, there are company-specific factors, such as company earnings – including the company’s debt levels, cash flows and earnings – as well as economic data, news reports and sector health.
For a more in-depth look, visit our guide on how stock markets work.
Whereas for the forex market, the price drivers are a bit more complex because you’re buying one currency while selling another, meaning you’ll need to be aware of the performance of not just one economy, but two. And because currency trading is fundamentally based on the economy, large price movements usually occur around macroeconomic data releases – such as unemployment, inflation and gross domestic product (GDP) – as well as news and political events.
When you trade forex or stocks with us, you’ll be using derivative products to do so. Instead of buying the asset outright, you’ll put down a deposit – known as margin – to open a leveraged position.
This allows you to get better exposure for trading both stocks and forex, alongside the opportunity to magnify any profits. However, it can also result in magnified losses if the market moves against you.
The FX market typically offers much higher leverage than the stock market – in some countries as much as 200:1. So, while the stock market can be considered less risky, forex can create the opportunity for greater profits with less upfront capital for those who know what they’re doing.
Whichever market you trade, it’s vital to manage the risk that comes with leverage.
Learn more about leverage and its risks
There can also be differences in terms of overnight financing, which is the cost you pay to hold a position open after markets close. Our standard financing rates are set at 2.5% +/- the benchmark regional interest rate.
See our costs and charges
For FX, because the market doesn’t close, the overnight financing is an adjustment to reflect the tom-next rate – the costs of buying and selling currencies over two different days. You can see further details on FX financing charges on the market information sheets in our platform.
Should I trade forex or stocks?
The choice between forex and stocks comes down to what your strategy is. The forex market is popular due to its flexible hours, lower fees, and higher trading volume. But the stock market is favoured by those looking to hold longer-term positions on a wider range of assets.
Trade forex and stocks with City Index
Whether you decide to trade forex, stocks or both markets, you can access thousands of markets with City Index:
- Open a City Index account, or log in if you’re already a customer
- Search for the asset you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
Or you can practise trading risk free by signing up for our demo trading account.