How to choose between forex and stocks
Learn all about forex and stocks – two distinct asset classes in financial markets – with liquidity, potential risks and benefits for traders, how to choose between forex and stocks, and how to trade financial markets via CFDs
Forex trading or stock trading: What are the key differences?
Forex and stock trading are two distinct markets, each with its own characteristics, advantages, and risks. Here are some key differences between forex and stock trading.
Forex trading
Forex (foreign exchange) trading involves the buying and selling of currency pairs, such as EUR/USD or GBP/JPY. The forex market operates 24 hours a day, five days a week, due to the global nature of currency trading, with major sessions in London, New York, Tokyo, and Sydney. Forex trading is highly liquid, with over $7.5 trillion traded daily.
Price movements in the forex market are influenced by macroeconomic factors, including central bank decisions, interest-rate changes, inflation data, and geopolitical events. Major economic releases, such as US non-farm payrolls or Federal Reserve meetings, can trigger sharp volatility in currency markets.
Learn more about the forex market in our comprehensive forex trading guide.
Stock trading
Stock trading involves buying and selling shares of publicly traded companies, such as Apple, Tesla, or Amazon. Unlike forex, stock markets have specific trading hours that vary depending on the exchange (e.g., the New York Stock Exchange operates from 9:30am to 4pm ET). Some brokers offer extended pre-market and after-hours trading, but liquidity is lower during these periods.
Stocks are influenced by company fundamentals, earnings reports, industry trends, macroeconomic indicators and broader economic conditions. Events such as product launches, leadership changes, or acquisitions can impact a stock’s price. While liquidity varies by stock, with large-cap stocks typically offering higher liquidity, smaller stocks can experience wider spreads and higher volatility.
Learn more about the stock market in our comprehensive shares trading guide.
Forex vs stocks: What are the markets’ characteristics?
Forex and stocks are two of the most actively traded financial markets, each with unique characteristics, and potential benefits and disadvantages. Here’s how they compare:
Market size, liquidity and trading hours
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Forex |
Stocks |
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Forex is the largest financial market in the world. Demand for forex is driven by governments, central banks, institutional investors, mutual funds, pension funds, and retail traders. High liquidity supports tighter spreads, though slippage can still occur during volatile market events. Forex markets operate 24 hours a day, five days a week, allowing traders to access the market at any time. Liquidity can decline during off-peak hours, particularly in less-traded currency pairs. |
Stock markets consist of thousands of publicly traded companies. Demand for stocks is driven by retail traders, hedge funds, mutual funds, pension funds, and institutional traders. Large-cap stocks, such as Apple and Microsoft, tend to have higher liquidity. Stock trading is limited to exchange hours, with pre-market and after-hours trading offering reduced liquidity. Smaller stocks may experience wider spreads and lower trade execution efficiency. |
Market depth and order types
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Forex |
Stocks |
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Forex markets are decentralised, over-the-counter (OTC) markets – there is no central exchange displaying full order book transparency.** Liquidity providers, such as banks and financial institutions, supply bid and ask prices, but traders do not have direct visibility of market depth. Order execution depends on broker pricing and liquidity conditions at a given moment. Forex provides high liquidity in major pairs, but depth fluctuates outside peak trading hours. |
Stock markets operate through centralised exchanges, where traders can see market depth through publicly available order books. This transparency allows traders to assess buy and sell interest at different price levels, helping to gauge sentiment and potential support or resistance zones. Stock traders have access to a wide range of order types, such as stop-limit or take-profit orders, used to limit potential risk. Liquidity in stocks can vary based on the time of day, market conditions, and stock-specific factors. |
**Some ECN brokers offer partial order book transparency, but most forex trading lacks full visibility of liquidity levels.
Trading strategies and holding periods
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Forex |
Stocks |
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Forex traders may opt for short to medium-term trading strategies. Some forex traders engage in day trading or scalping, aiming to capture gains on small price movements using technical analysis. Holding a forex position overnight may result in interest payments or credits, depending on the relative interest rates of the traded currencies – and potential overnight funding charges. |
Stock traders may adopt day trading or swing trading strategies based on technical patterns. Some traders hold stock positions for years, aiming to benefit from long-term price growth. Stock traders do not typically receive interest on held positions, but may earn dividends if applicable, depending on the company. |
Gaps and market crashes
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Forex |
Stocks |
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Forex operates continuously from Monday to Friday, reducing but not eliminating the risk of gaps. Fundamental market events – such as central bank interventions – can trigger quick price swings. For example, in 2015, the Swiss National Bank unexpectedly removed the Swiss franc’s peg to the euro, causing the CHF to surge and many forex brokers to experience substantial losses. While forex gaps are less frequent than in stocks, they can still occur, especially after weekends or unexpected geopolitical events. |
Stocks are susceptible to gaps, particularly when major news is released outside of trading hours. Earnings reports, regulatory announcements, or macroeconomic shifts can cause broad price movements between a stock’s closing price and its next opening price. Stock markets can also experience flash crashes, such as the 2010 Dow Jones plunge, which saw prices drop sharply before recovering within minutes. Sudden liquidity imbalances can lead to substantial price swings, particularly in less frequently traded stocks. |
Interest rates and inflation
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Forex |
Stocks |
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Currency pairs react strongly to interest rate decisions, as central bank policies directly influence currency valuations. Higher interest rates generally strengthen a currency, as they attract foreign investment seeking better returns. Lower interest rates tend to weaken a currency, as traders seek higher yields elsewhere, leading to capital outflows. Inflation data influences forex trading, as rising inflation may prompt central banks to adjust monetary policy, affecting exchange rates. However, inflation’s impact depends on expectations, economic conditions, and central bank responses. |
Stocks are influenced by interest rates, but in a different way – they impact corporate borrowing costs and investment flows. Rising interest rates can lead to lower stock valuations, as companies face higher financing costs, potentially slowing growth. Lower interest rates may support stock markets by making borrowing cheaper, encouraging corporate expansion and investment. |
Past performance doesn’t guarantee future results.
What are the similarities between forex and stock trading?
Forex and stock markets share several key similarities. Both are financial markets where traders can speculate on price movements, either through direct ownership of the asset (in the case of stocks) or via derivatives such as contracts for difference (CFDs).
Derivatives trading – CFDs are financial instruments that derive their value from an underlying asset, such as a stock or the price movements of a forex pair. Traders can use CFDs to take advantage of both rising and falling markets by opening a long (buy) position if they expect prices to increase, or a short (sell) position if they anticipate a decline.
Market analysis – Both forex and stock traders rely on fundamental and technical analysis to make informed decisions. Fundamental analysis in forex focuses on macroeconomic indicators, such as interest rates and inflation, while stock traders assess company earnings, financial reports, and industry trends. Technical analysis, including chart patterns and indicators, is widely used in both markets to identify potential trade opportunities.
Market participants – Forex and stock markets attract a wide range of participants, from retail traders to institutional traders, hedge funds, and market makers. Liquidity providers play a crucial role in both markets, ensuring competitive bid-ask spreads and efficient trade execution.
Diversification and hedging – Some traders choose to participate in both forex and stock markets as part of a broader trading strategy. Diversification involves spreading risk across different asset classes to reduce overall exposure to a single market. Hedging allows traders to offset potential losses in one position by taking an opposite position in another correlated asset. For example, a stock trader concerned about currency risk might hedge by taking an opposing position in a forex CFD linked to the relevant currency pair, helping to offset potential exchange rate fluctuations.
Discover more about contracts for difference (CFDs) in our CFD trading guide.
If you want to master forex trading try our step-by-step forex course.
