FOREX VERSUS STOCKS

Forex and Stocks have similar characteristics but one big difference in that to own a stock is to own a piece of the company that issued the stock.

Introduction:

The Forex market is very different from the Stock market in that if you own a stock you also own a piece of the company whose stock it is, whereas, if you own a currency which you have purchased in the Forex market, you own the currency, but not a piece of the country of the currency. The Forex market is a currency market where currencies are traded. The Stock market is a market where stocks are traded. Both the Forex and the stock markets quote two way prices.

Forex versus Stocks:

The Forex market and the stock markets are both twenty four hour markets during the week. However, in the Forex market you can trade for example EUR/USD when the Tokyo Forex Centre is open and the European and American Forex Centres are closed. However, you can’t buy the stock of a London company that is listed on the London Stock exchange and not listed on the Tokyo stock exchange.

You may be asking yourself why a company would allow its shareholders have a share of the assets and earnings of the company. The answer is that the companies need money and there are only two ways by which they can raise the money. One is by issuing shares (Equity Financing) and the other is by borrowing money from a bank or from the money market (Debt Financing).

Currencies are bought and sold in a Forex market where there is no physical building to house the market but instead is a network of computers linked to large financial institutions, banks, retail traders and brokers. Currencies are not kept anywhere and there is no physical exchange of an asset as everything is done electronically.

Stocks however are bought and sold in a stock exchange. Each stock exchange has a range of stocks that are listed on it. A stock that is listed for example on the New York stock exchange will not be listed on the Sydney stock exchange. In effect each stock exchange is a supermarket where different types of stocks can be bought. You don’t have to go to a stock exchange to buy or sell stocks but you have to buy and sell stocks through a broker that is attached to the New York stock exchange.

Just like the Forex market where there are major centres in the major time zones of the Far East (Sydney-Tokyo-Hong Kong), Europe (London) and America (New York) there are major stock exchanges in the same centres.

Without these exchanges for stocks the only way they could be bought or sold would be through advertising and also the price would not be transparent and you would have to haggle on the price.

Because both the Forex market and the stock market are electronic markets the price changes can be tracked and immediately known. Investors can see the effect economic and political news and company news has on the price of a stock or on a currency.