Investment is a financial growth strategy practised around the world, and in numerous different markets. Generally, it means buying into an asset, such that you own a portion of it, or a representation of its value. That way, if the asset becomes more valuable, you can sell what you own for a profit.
The forex market and stock markets represent two of the most popular avenues for investment in the world. Both can take different forms, and be accessed by way of a variety of brokers and trading platforms. But both allow people to invest in the value of heavily traded, popular assets.
That said, the forex trade and stock markets are not one and the same, nor do they necessarily overlap in a direct way. Forex refers to “foreign exchange,” or more clearly the global currency trade. Stock markets, on the other hand, are defined as being where buyers and sellers trade equity (meaning stocks or shares) of companies.
What is Forex?
Forex, or foreign exchange, is the trade of currencies against each other. The idea is for investors to capitalise on changes in respective value, which occur throughout each and every day. So for instance, if the Euro is worth 1.10 U.S. dollars one day, and it’s worth 1.20 USD the next, it has gained value, and there’s a profit to be made by traders.
There are different ways to trade forex, depending on the broker or platform any given investor is using. The most straightforward way is to “buy” or “sell” a currency pair — such as EUR/USD — according to what you believe will happen. If you think the base currency (the first one listed) will gain value against the quote currency (the second), you buy the pair and hold the position for as long as you wish; if you think the bas currency will lose value, you sell the pair.
Forex can also be traded through CFDs (contracts for difference), which work similarly, but reward you for being correct about the direction of the pair’s movement, as opposed to how you time your position. Furthermore, forex trades can be made with leverage, which allows traders to trade with more money than they actually invest, maximising potential for gains, but also adding risk for more significant losses.
In assessing the forex market, we should note that investors will find several dozen currency pairs listed. Only official, primary currency units are listed — so for instance, you will see the pound listed but not the quid, per our look at the difference between pound and quid. Likewise, you won’t see incremental units listed — meaning you will see the U.S. dollar, but not, say, the quarter.
What is the Stock Market?
We defined the stock market above as being where buyers and sellers trade equity. Essentially, it’s a market in which companies’ values are listed as share prices. An investor can purchase a share — in a sense, a small piece of the company — for the listed price. Then, if that price goes up, the investor can sell the share back for a profit (or, if the price goes down, the share can be sold at a loss).
The stock market caters to both long- and short-term investors. While forex trades are often conducted in fairly short time, so as to capitalise on currency values’ more minimal fluctuations, some stock market positions are held for weeks, months, or even years at a time. It’s also not unusual for an investor to purchase a significant number of shares in an asset, and later sell some of them while holding onto the rest.
Another key distinction is that while forex is universal, stock markets are divided into numerous exchanges around the world — with the biggest (by market cap) being those in the U.S., East Asia, and Europe. Different stock exchanges include different listings, with countless companies listed overall around the world.
Conclusion
Both forex and stock markets are financial exchanges in which traders and investors can seek to grow their wealth. Both also see incredibly high volumes of trades; the forex market is the most high-volume exchange in the world, yet stocks are what many people think of first when they consider the idea of investment.
The difference is that forex deals exclusively with currency speculation, whereas stock markets revolve around company listings. While some of the investment concepts and trading methods are similar across both markets, they remain unrelated.