NAIROBI, Kenya, March 8 – Many traders or potential participants in the international financial market confuse the foreign exchange market and the stock market for the same thing. Such misunderstanding stems from ignorance of what the two entail and their place in the financial market.
Forex market is a place where currencies of different countries are traded for profit while 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 foreign exchange and equity markets. They protect investors from nefarious brokers and also establish and enforce the rules governing the activities of the forex and stock markets.
The Nairobi Securities Exchange (NSE) is the exchange where investors buy and sell shares of companies in Kenya. This exchange is large in Kenya and is mostly dominated by Kenyan investors.
If you are a trader or a potential investor, it is important to understand the differences between forex and stocks before you engage in active trading of these financial instruments. This understanding will help you choose the instrument that you are most comfortable with and that best suits your interests.
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, and more.
The forex market deals with the trading of different currencies while the stock market is all about investing in stocks or shares of companies.
Most business owners want to raise capital by selling fractions of their business to the public. This fraction is known as shares. In doing so, they open the ownership of the company to the public. Investors who buy the shares of the company are called shareholders. These shareholders share in the profits of the company in the form of what are called dividends. Shareholders also bear the risk of the company because if the company declares a loss, they do not receive a dividend.
Investors in Kenya can invest in shares listed on the NSE and traders can trade derivatives on listed instruments.
In the forex market, investors, speculators, banks and various parties participate for different reasons which can be hedging, speculation or trading transactions.
For retail traders in the forex market, a profit is made when one currency appreciates against the other in the pair. Online retail forex brokers in Kenya are regulated by the CMA, and traders can trade CFDs on currency pairs available at regulated brokers.
It is important to understand that forex trades in pairs. For example, EUR/USD, GBP/USD, etc.
When you place a sell trade on the EUR/USD, you are buying the US dollar and selling the euro because you are projecting a rise in the USD against the EUR. If your projection is correct, your profit will be the difference between the spot rate at the start of the trade and at the close of the trade. You can also lose if the EUR appreciates against the USD contrary to your projection.
- Market Trading Hours
The periods or time that an instrument is open for trading makes another difference between forex and stock markets.
The global forex market is open 24 hours a day, five days a week, from 5:00 p.m. EST on Sunday to 4:00 p.m. EST on Friday. This gives forex traders more time for trading and also to monitor their trades. However, this also has its downside as market activities can take place while one is sleeping or working.
On the other hand, the trading hours of the stock market depend on the exchange on which the shares are listed.
Most stock markets open in the morning and close in the evening, just like normal working hours. In Kenya, the Nairobi Stock Exchange opens trading at 9:30 am and closes at 3:00 pm East Africa Time. Traders and investors see the state of the market on the NSE portal
The NSE also opens its floors for trading every day from Monday to Friday except on 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 this would also affect the stock market in general. Whereas for an individual stock, a reshuffle of a company’s board of directors can cause its stock price to fluctuate.
Some of the factors that influence the stock market differ from those that influence the forex market. But in general, all factors that impact an economy affect both stocks and the forex market.
But factors that affect an individual stock are unlikely to affect the forex market.
The trajectory of a company’s stock price is typically influenced by factors such as the company’s debt level, cash flow and profit levels, news stories and the health of the industry.
In the forex market, the price of currency is influenced by a variety of different factors. These factors are related to the economic, political and social stability of the country owning the currency. These factors include; interest rate, unemployment rate, inflation, gross domestic product (GDP), political stability, etc.
Leverage offers traders or investors the opportunity to make more profit with less capital.
It involves using funds borrowed 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 big losses when the trade goes against one’s projection.
Leverage is the most common in forex. In fact, it is higher in forex trading compared to the stock market.
CMA regulated FX brokers can offer leverage of up to 1:400. When you invest in stocks, there is no leverage. Leverage is available on exchange futures.
In the forex market, leverage is usually high compared to the stock market. This is the difference between the two markets when it comes to leverage.
Markets with high volatility will experience price changes quickly while those with low volatility generally have a slow rate of price change.
The forex market is known to be very volatile, especially exotic currency pairs. This is due to the high volume of transactions carried out in the market, as it is traded globally and almost 24 hours a day. Currencies rise and fall daily.
Unlike the forex market, price movement in the stock market happens slowly. Although in rare situations, the market becomes more volatile due to news reports or economic instability.
It is important to keep in mind that price fluctuations or changes in the forex market can happen faster than those in the stock market. When there is high volatility in the stock market, it usually affects all stocks listed on that particular stock exchange whereas for forex, it is the currency of a particular country that will be affected by the changes.
Liquidity refers to the ease with which an asset or financial instrument can be traded in the market. It can also refer to the availability of a financial instrument in the market.
The higher the trading volume of a particular instrument, the more liquid it is, as this shows that money is flowing into the market. It gives the impression that other people are taking the opposite of your profession.
Liquidity is another differentiating characteristic between forex and equity markets. The foreign exchange market is very liquid compared to the stock market. In fact, approximately $6.6 trillion is traded daily in the global forex market.
The stock market is not as liquid as the forex market. Supply and demand for individual company stocks may be exhausted. This is coupled with the fact that the stock market has a lower trading volume than the forex market. In some cases, it may be difficult to get buyers or sellers of many less popular stocks. This makes them not too easy to trade.
The bottom line here is that the forex market is more liquid than the stock market and that is a difference between the two.
Shares are traded on a central stock exchange. Shares of Kenyan companies are traded on the Nairobi Stock Exchange.
The foreign exchange 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 financial markets, there is a huge difference in terms of how the two work and what they entail.
As an investor or even if you are a trader, you must fully understand the market you want to participate in and its risks.