NAIROBI, Kenya, March 8 – Many traders or intending participants in the international financial market confuse the forex market and stock market for the same thing. Such misunderstanding stems from ignorance of what both entails and their place in the financial market.
The forex market is a place where currencies of different countries are traded for profit while the stock market is a place where shares of a company) are bought and sold.
In Kenya, the Capital Markets Authority is responsible for regulating the activities of the forex and stock markets. They protect investors from nefarious brokers and also set and enforce the rules guiding activities of the forex and stock markets.
The Nairobi Securities Exchange (NSE) is the exchange where investors buy and sell stocks of companies in Kenya. This Exchange is prominent in Kenya and is mostly dominated by Kenyan investors.
If you are a prospective trader or investor, then it is important to understand the differences between forex and stocks before venturing into active trading of these financial instruments. This understanding will help you in choosing the instrument that you are most comfortable trading with and which best suits your interest.
These points below will provide a detailed analysis of the differences between forex and stock markets.
Difference between Forex and Stocks
The differences between forex and stocks range from the instrument itself, trading hours, factors that affect their price fluctuations, liquidity, volatility etc.
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- The Instruments
The forex market deals with trading the different currencies, whereas the stock market has to do with investing in stocks or shares of companies.
Most business owners want to raise capital by selling off fractions of their business to the public. This fraction is known as shares. By doing this, they open up the ownership of the business to the public. Investors who buy the company shares are called shareholders. These shareholders share the profit of the company in what is called dividends. Shareholders also bear the risks of the company because if the company declares a loss, they don’t get paid dividend.
Investors in Kenya can invest in the equities listed on the NSE&traders can trade derivatives on the listed instruments.
In theforex market, investors, speculators, banks & various parties participate for different reasons which can be hedging, speculating or for business transactions.
For retail traders in the forex market, profit is made when one currency rises against the other in the pair. The retail online forex brokers in Kenya are regulated by the CMA, and traders can trade CFDs on the currency pairs available at regulated brokers.
It is important to understand that forex is traded in pairs. For example, EUR/USD, GBP/USD etc.
When you place a sell trade on EUR/USD, you buy the U.S dollar and sell the Euro becauseyou project the USD to rise against the EUR. If your projection is correct, your profit will be the difference in the spot rate at the beginning of trade and the close of trade. You can also lose if the EUR rises against the USDcontrary toyour projection.
- Market Trading Hours
The periods or time an instrument is open for trading makes another difference between forex and the stock markets.
The global forex market is open 24 hours daily and five days per weekfrom 5pm EST on Sunday till 4pm EST on Friday. This provides forex traders more time for trading and also monitoring their trades. However, this also has its downside as market activities might be going on while one is asleep or working.
On the other hand, the trading hours for the stock market are dependent on the exchange the stocks are listed on.
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Most stock markets open in the morning and close by evening just like normal working hours. In Kenya, the Nairobi Securities Exchange opens trading at 9:30 AM and closes by 3:00 PM East African Time. Traders &investors& see the market status on NSE’s portal
The NSE also opens its floors for trading every day from Monday till Friday except in the cases of public holidays.
- Market Influencers
While both markets are influenced by demand and supply, there are specific factors that influence the rise and fall of currencies or company stocks.
For example, political instability in a country can cause its currency to fall, and it would also affect the stock market in general. While for an individual stock, a reshuffle of a company’s board can cause a fluctuation in its stock price.
Some of the factors that influence the stock market differ from those that influence the forex market. But in general, any factors that impact an economy, affects both the stock & the forex market.
But the factors that affect an individual stock will likely not affect the forex market.
The trajectory in the price of a company’s stocks is usually influenced by factors such as the company’s debt level, cash flow and profit levels, news reports and industry’s health.
in the forex market, the price of currency is influenced by a whole set of different factors. These factors have to do with the economic, political and social stability of the country that owns the currency. These factors include; interest rates, unemployment rate, inflation, Gross Domestic Product (GDP), political stability etc.
- Leverage
Leverage provides traders or investors with the opportunity to make more profit with less capital.
This involves using borrowed funds from the broker to trade. Leverage has been said to be a double-edged sword as it can magnify one’s profit and also lead to great loss when the trade goes against one’s projection.
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Leverage is most common in forex. In fact, it is higher in forex trade compared to the stock market.
CMA regulated FX brokers canoffer leverage as much as 1:400. When investing in stocks, there is no leverage. Leverage is available on Futures trading on the exchange.
In the forex market, leverage is usually high when compared to the stock market. This is the difference between both markets when it comes to leverage.
- Volatility
Markets with high volatility will experience changes in price quickly while those with low volatility usually have a slow rate of price changes.
The forex market has been known to be highly volatile, especially the exotic currency pairs. This is as a result of the high volume of trading being carried out in the market since it’s traded globally and almost 24hrs every day. Currencies move up & down daily.
Unlike the forex market, price movement in the stock market occurs slowly. Although in rare situations, the market becomes more volatile due to news reports or economic instability.
It is important to bear in mind that price fluctuations or changes in the forex market can happenmore quickly compared to that of the stock market. In the event of high volatility in the stock market, it usually affects all stocks listed on that particular exchange whereas for forex, it is a particular country’s currency that will be affected by the changes.
- Liquidity
Liquidity refers to how easily an asset or financial instrument can be traded in the market. It can also refer to how available a financial instrument is in the market.
The higher the volume of trade for a particular instrument, the more liquid it is as it shows that money is being pumped into the market. This creates the impression that other people are taking the opposite of your trade.
Liquidity is another differentiating characteristic between the forex and stock markets. The forex market is highly liquid when compared to the stock market. In fact, around 6.6 trillion dollars is traded in the global forex market daily.
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The stock market is not as liquid as the forex market. Supply & demand for Individual stocks of companies can be exhausted. This is coupled with the fact that the stock market has a lower volume of trades when compared to the forex market. In some cases, it can be difficult to get buyers or sellers of many not so popular stocks. This makes them not too easy to trade.
The bottom line here is, the forex market is more liquid than the stockmarket and this is one difference between both.
- Decentralized
The stocks are traded on a central exchange. The stocks of Kenyan companies are traded on the Nairobi Securities Exchange.
The forex market on the other hand, is an over the counter (OTC) market. There is no central exchange in the forex market.
These are some of the few features that differentiate the forex market from the stock market. Although both are traded in the financial markets, there is a huge difference in terms of operation of both and what they entail.
As an investor or even if you are a trader, you must fully understand the market that you want to participate in, and its risks.
