Let me first answer the question, “What are these two markets?”
Then we can go on to see how they differ.
The Foreign Exchange Market is around forty years old, being established in the early 1970s. It is also known as the FX market and the Forex market and it’s involved with trading currencies from two different countries, e.g., United States Dollar and the Japanese Yen (USD/JPY) or the British Pound and the Canadian Dollar (GBP/CAD). As one currency rises, the other declines.
Let me give you a simple example:
You ‘buy’ Canadian Dollars using British pounds when, for example, the £1 = 4CAD. You then hope to ‘sell’ the Canadian Dollars when the rate has changed to say, £1 = 2CAD (i.e. 1CAD = £0.50)
Let’s say you start with £100. You look at the trading figures and assess that you should Buy. £1 buys 4CAD, so your £100 buy 400CAD. So you have 400CAD. You judge when to Sell. Later 1CAD buys £0.50, so your 400CAD buy £200. You’ve turned your £100 into £200. You’ve doubled your money!
The Stock Market, on the other hand, usually trades in one currency within one country’s stock exchange, but trades in many different goods or commodities.
Let me give you some examples:
You ‘buy’ 500 tons of wool at say, $30/ton (total cost is $15,000). When the price changes to say, $60/ton (total cost is $30,000), you ‘sell’. Profit, $30 x 500 (or $30,000 – $15,000) = $15,000!
You ‘sell’ 10,000 gallons of beer at say, £10/gallon (total cost is £100,000). You ‘buy’ when the price changes to say, £8/gallon (total cost is £80,000). Profit, £2 x 10,000 (or £100,000 – £80,000) = £20,000!
The simple explanation of each market above actually shows us the major differences between the two markets:
(1) The Forex market deals in only one commodity, i.e. currencies, while Stock Markets deal in many varied commodities.
(2) The Forex market deals in all major currencies of the world, in pairs, while Stock Markets usually deal with the single currency of the Country of that Stock Market.
(3) There is only one Forex Market, although it operates in a number of Countries, whereas there are many Stock Markets in many Countries.
One thing which is actually the same for each market is that the trader doesn’t ‘own’ whatever is being traded. The whole transaction takes place ‘on paper’ as it were.
Other major differences.
What is not obvious from my comparison above is the actual volume of trading in each market type. Millions upon millions are traded daily on the Forex market. In fact nearly two trillion dollars are traded daily. This amount is much higher than the money traded on the daily Stock Market of any country.
The Stock Market of each Country has set business hours which normally follows that Country’s business day. The Forex Market is open for 24 hours a day as the different Countries involved around the world operate in the different time zones around the world. (The Forex Market does close at weekends when none of the world’s markets is trading.)
With Forex Trading, you can often forecast how you could double your money and put automatic ‘stop trading’ notices in place when you have achieved this. On the Stock Market, it is not quite so easy to predict what might happen.
To deal in the Forex Market you can open a trading account with a platform such as ‘eToro’ or ‘Bet On Markets’. This can easily be done on the internet. When you have chosen your platform, you can do some practice trading to get yourself used to what happens. When you feel confident, you can trade for real.
To deal in the Stock Market in your Country you will need to find a broker. There are many online brokers that you can open an account with, so you simply need to choose one. When you have picked your broker, you will need to open an account and put money into that account. You can usually speak directly with your broker over the telephone to buy or sell your shares.