Trading in the UK’s stock and Foreign Exchange (FX) markets can seem similar, but they have many underlying differences. Each market type has unique characteristics that can affect one’s trading strategy, costs, fees, liquidity, and regulations. Before entering either market, one must be aware of these critical differences.
This article will explore the main differences between stocks and FX trading in the UK so you can make an informed decision about how to move forward with your investments. To get started trading, you can visit Saxo.
What is forex trading?
Forex trading is the practice of buying and selling currencies – in pairs – in an attempt to make a profit from fluctuating exchange rates. It is one of the most popular ways of trading worldwide, and trading takes place online in the foreign exchange market.
The foreign exchange market, also known as the forex market, is a global network of banks, brokers, and other financial institutions that trade one currency for another. The forex market is decentralised, meaning it does not have one governing body that oversees and controls it.
What is stock trading?
Stocks, also known as equities, are part of a company’s ownership structure and represent shares in the business. When investing in stocks, you become a shareholder, which entitles you to certain rights, such as voting on company decisions and receiving dividend payouts from profits. The performance of stocks depends on how well the company performs and any changes in the industry or economy. Stock trading takes place in stock markets around the world.
Key differences between stock and FX trading in the UK
Now that you know what forex trading and stock trading are, let’s look at the critical differences between the two.
Liquidity
The liquidity of a market refers to how quickly it can buy or sell assets, and it describes the level of activity within a market.
The forex market is the largest and most liquid market in the world, with trillions of dollars of trades a day. Stock market liquidity depends on the specific stock market.Nevertheless, for both, the liquidity of trades depends on the specific instrument.
For example, major forex pairs such as those including the US dollar tend to be very liquid, with many traders buying and selling US dollars at any given time. However, not the same can be said of more exotic currency pairs, such as those including lesser-traded currencies like the Brazilian real, the Norwegian krone, or the South Korean won.
Meanwhile, the same can be said for stocks. Blue-chip stocks – shares from large companies like Apple, Amazon, Meta – are often in circulation and are highly liquid. Stocks from smaller companies that are lesser known will be in circulation less, and therefore less liquid.
Fees & commissions
Forex trading typically has lower fees and commissions than stock trading, yet this is not set in stone as it depends on the broker you trade with.For most brokers, there is no exchange commission on forex trades as they occur directly between two parties. On the other hand, stock traders are subject to commissions when buying or selling shares on a traditional exchange. To be sure, you should check with your specific broker.
Leverage
Leverage is a term used to describe the ability to control more capital than has been invested. Forex trading offers leverage, and traders can use a small amount of starting capital to open large positions. On the other hand, stock trading does not typically allow traders to utilise leverage. If traders want to take advantage of leverage, they may trade stock derivatives, such as stock CFDs or stock options.
Volatility
Volatility measures how rapidly an asset’s price changes over time. Again, there is no set volatility for either the forex market or the stock market, as instruments have varying levels of volatility depending on various factors.
Market hours
The forex market is open 24 hours a day, five days a week. It opens in sessions, ranging from the Asian and European timezones to the North American timezone. Traders worldwide can participate in any session. The forex market is closed to retail traders on the weekends.
Stock market hours, on the other hand, depend on the exact stock market you want to participate in. Most of them follow local timezones, opening in the morning and closing in the late afternoon. Positions left open overnight may incur charges, depending on the broker you work with.
All things considered
When choosing between stock and FX trading in the UK, it’s essential to understand the critical differences between these two markets so you can see which one suits your investment strategy and preferences best. Nevertheless, you should remember that the two markets are not representative of each instrument, so you should always check the market charts of the specific instrument you want to trade instead of just looking at the markets as a whole.
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