Is it better to trade Forex or the stock market? In this article the difference between the two markets for beginners.
This question, when viewed by a professional or an expert, does not seem to make much sense, yet many beginners and newbies to trading ask it. An absolutely legitimate question given the lack of preparation of the interested party and which in fact opens up to answers and many other questions about trading.
The answer to this comparison between two very different markets is perhaps one of the best ways to explain and understand the nature of the instruments examined and their main differences. Many they open a trading account without knowing what they are operating on, what they are trading on, therefore knowing the differences between one instrument and another is absolutely important and decisive in the future operations of a neophyte trader. In this sense, we will see the main differences between Forex and the stock market by emphasizing the risk component, a central component in the trader’s profession.
Forex or stock?
A question that many beginners ask when they have to choose to be able to operate on various tools. We must immediately go to point out that most beginners and neophytes start with a trading account that operates through CFDs, unregulated derivative financial instruments that replicate the performance of underlyings listed on regulated markets.
The first substantial difference between Forex and stock is the fact that in Forex you negotiate on currency pairs, i.e. you buy a currency because you think it should appreciate against another currency. In the stock market, mainly the one that concerns stock indices, you go to buy instruments that replicate the performance of stock indices, i.e. indexes that put together a basket of stocks that have particular characteristics, whether geographic or capitalisation.
As we can see, they are by nature two profoundly different markets, on the one hand we find a market that trades currencies, on the other hand a market that concerns listed companies or, to be precise, indexes that summarize the performance of a certain basket of companies. To answer newbies, they are two profoundly different markets, which therefore have profoundly different basic characteristics.
Regulated and unregulated markets
The currency market, the Forex, is an unregulated market. What does unregulated market mean? Quite simply, it is a market that does not require a supervisory body to monitor exchanges and the quotations of the financial instruments that make up the market. To take a very basic example, if a person exchanges euros for dollars in an airport, whether this exchange is made by two tourists or by a tourist at an exchange counter, no one will check and register this exchange with a market regulator currency. If I wanted to exchange euros for dollars at an exchange rate much more advantageous for me than the exchange rate normally quoted on Forex, no one will be able to supervise the presumed "legitimacy" of this exchange. In essence, Forex is an absolutely free market, at least in theory.
The stock market, on the other hand, is a regulated market, ie trades and their legitimacy are supervised by control and monitoring bodies. For example, in Italy we have Borsa Italiana which supervises the trading of shares listed on Borsa Italiana and the regulation in this regard is carried out by Consob and the Bank of Italy. As you can see, for shares we have a trading venue for shares, in this case Borsa Italiana, with Consob and Banca di Italia which supervise the legitimacy of the transactions that take place within the stock market trading. But why is there this difference? Quite simply Forex is such a huge market that it is not controllable. It would be impossible to monitor and control the legitimacy of money exchanges globally on all currencies, therefore it is an unregulated market due to structural limitations. The stock market, on the other hand, being a relatively smaller market, is a market that can be controlled as the exchange of securities takes place within the circuit of the reference stock exchange, therefore the quotations are the same for all market participants.
Market size and risk
A larger market, called “more liquid” in financial jargon, is a market that has quotations that tend to be the same for everyone even if it is not regulated since it is the market itself that regulates its greatness. In this case Forex, being the global currency market, is a very liquid market and due to its size it has a huge number of exchanges on various price levels.
This feature is crucial in terms of risk configuration as a very liquid market tends to move less than a smaller market. So we can say that Forex is a very liquid market and therefore a market that moves less than other markets.
This leads us to consider Forex as a non-volatile market and therefore less risky than a smaller market such as the stock market. The stock market on the other hand, being smaller, albeit regulated, is more risky. The mass volume of currencies on a global scale is certainly larger than companies listed on financial markets. In practice, the stock market, being smaller in terms of value and volumes, is a riskier market and, being such, it is a market that requires regulation.
What to trade?
There isn’t one market that is better than the other, but rather a market more suited to the type of trading you want to do. A trader who initially wants to risk little has more possibilities of managing risk adequately on Forex than on the stock market, as he has a greater probability of finding counterparts for his operations. The stock market, being a riskier and less liquid market than Forex, has characteristics more suitable for those who do more advanced trading, where there is greater awareness of the operational risk and the risk of one’s capital. Therefore, if you are a beginner, the assessment of the risk and of the instruments on which you operate is a fundamental thing and which will be decisive for the type of operation you are going to do.
Original article published on Money.it Italy 2023-01-17 08:57:00. Original title: Trading per principianti: meglio il Forex o l’azionario?
