Forex and the stock market are some of the oldest financial markets(mercados financieros más antiguos) in the world. Though trading is risky, these markets have been a source of wealth generation for so many people.
Over the years, I’ve noticed that most people want to dip their feet in forex and the stock market, but they don’t. It’s because they don’t understand how it works.
So, if you want to learn all the ins and outsof forex and stock markets, stick with me as I’ll be sharing my knowledge about these markets in this article.
Without further ado, let’s begin.
What are Trade Markets?
The forex market is an over-the-counter (OTC) market that operates around the clock except for the weekends. Arguably, the forex market is one of the largest financial markets in the world with a global daily volume of $7.5 trillion.
Generally, currency pairs have the larger shares(acciones más grandes) in the forex market’s volume. However, commodities such as gold, silver, crude oil, natural gas, wheat, and more are also listed on the forex market.
Besides the individual traders, below are the massive financial institutions (instituciones financieras) that are responsible for the large trading volume in the forex market:
- Commercial Banks
- Central Banks
- Hedge Funds
- Investment Management Firms
The word “stock” in the stock market (mercado de Valores) represents the partial ownership of a company. Companies listed on the stock market may put up their shares for sale to raise investment. On the other hand, people and financial institutions that buy those shares become partial owners of the company. In short, the stock market works like a middleman (intermediario) or a contact point between the buyers and sellers.
Usually, a company issues two types of stocks:
- Common Stock – Offers voting rights to stockholders on company matters.
- Preferred Stock – Offers higher fixed dividends to stockholders.
Besides the stocks, a company may also list their:
- Debt Securities – term finance certificates, convertible bonds, commercial papers, and more.
- Derivatives
- Exchange Traded Funds (EFTs)
| Tidbit: An over-the-counter (OCT) market is a decentralized platform where buyers and sellers can engage without the involvement or supervision of any third-party regulator. Buyers and sellers can set their terms, rates, and more in an OCT market. |
How Do These Markets Operate?
The forex market is a highly decentralized platform (plataforma altamente descentralizada) as a single financial market does not control it. Here’s a detailed breakdown of how the forex market works:
Trading Sessions:
The forex market includes four trading sessions: Sydney, Tokyo, London, and New York. Since these trading sessions always overlap, the forex market does not close on weekdays, which is a major reason why it has such a large volume.
Currency Pairs:
Currencies on the forex market are always bought or sold in pairs, such as EUR (EURO)/USD (United States Dollar), or USD/GBP (Great Britain Pound). The first currency in the pair indicates the base currency (which is bought) and the second currency indicates the quote currency (which is sold).
Market Mechanism:
- Bid Price: It is the price at which the market is willing to buy the base currency.
- Ask Price: It is the price at which the market is willing to sell the base currency.
- Spread: It is the price difference between the bid and ask price.
Leverage:
The concept of leverage is significant in the forex market as it allows traders to hold larger positions with small equity. Traders may multiply their profits with higher leverage. But in case a trade does not go their way, a high leverage may wipe out their accounts.
Stock Market:
Unlike the forex market, the stock markets do not operate around the clock and usually follow the local business hours. Now, let’s see how stock markets work:
Centralized Exchanges:
Stock markets worldwide often operate on centralized exchanges, which may be highly regularized by government bodies to ensure transparency and fairness in stock trading.
Stock Symbols:
Companies listed on the stock market are recognized by their symbols such as AAPL is used to identify Apple and TSLA for Tesla.
Market Mechanism:
There are three types of orders in the stock market:
Market Order: Buy or sell the stock at the current market price.
Limit Order: Buy or sell the stock at a specified price.
Stop and Take Profit Orders: Close an open position to minimize the loss or book profits when the market reaches a specified price.
Besides order types, the concept of bid and ask price is also found in the stock market. However, it’s a bit different than the one used in the forex market:
- Bid Price: It’s the highest price a buyer is willing to pay for a stock.
- Ask Price: It’s the lowest price a seller is willing to accept for a stock.
- Spread: It’s the difference between the bid and ask price which is used to calculate the cost of trading a stock.
Dividends:
Based on how well a company performs financially, its stockholders receive a small percentage or amount from the company’s profits.
How to Invest in These Markets?
Forex Market:
The first step in investing in the forex market (mercado de divisas) is to search for a reliable brokerage platform. As the forex market has grown tremendously over the past years, a lot of trust-worthy brokerage platforms like Exness, OctaFX, and Pepperstone are available.
Once you’ve finalized the brokerage platform (plataforma de corretaje), you may easily create an account and transfer funds. Once your funds arrive in your broker’s account wallet, you are all set to invest in the forex market.
Stock Market:
Unlike a forex market, multiple stock markets can operate in a country. For example, Mexico has two stock markets; the Mexican Stock Exchange (BMV) with 144 listed companies, and Bolsa Institucional de Valores (BIVA) with 82 listed companies. Collectively, their market cap (capitalización de mercado) is expected to reach $0.62 trillion by 2025 with companies like Walmex, FEMSA, and American Movil having the biggest shares.
As there can be multiple stock markets in a country, investing in stocks can be a little tricky. It’s because you may need to watch out for a company listed on a specific stock market. That said, most global stock markets (mercados bursátiles mundiales) are accessible via online brokers where you can buy or sell stocks.
Besides online brokers, you may also buy or sell the company’s stocks physically. For that, you may need to reach out to a brokerage firm that deals with the specific stock market you want to invest in.
Pre-Requisites to Invest in These Markets:
The forex and stock market have their differences. However, there are a few common factors that you should be mindful of before investing in these markets:
Always Use a Reliable Internet:
In my initial days, although I used Exness for the best spreads on commodities, currency pairs, and stocks, what I always missed was a reliable internet connection.
One day, while searching for a reliable ISP, I called Spectrum en español support and inquired about their plans. Since my trading buddies were already using it and had a good experience, I also subscribed to one of their high-speed internet plans.
I am thankful for my wise decision, trading is now a breeze!
Let me explain why a reliable internet is a must for trading. Every brokerage platform requires connectivity to fetch real-time trading charts, volume, and trends from the markets. Plus, brokerage platforms may fail to execute your limit orders on poor connectivity.
Besides a reliable connection, ensure that your ISP offers 24/7 support like Spectrum servicio al cliente en español because, in case of any outage, you may not be able to close your trades and risk your equity being washed away.
Practice on a Demo Account:
Almost all the reliable brokerage platforms, such as Exness, IG Trading, and more offer a free demo account to practice your strategies on.
A demo account is particularly helpful in providing a real trading environment to beginners. With a demo account, beginners can execute trades with virtual money. This way, beginner traders can easily test out their strategies without risking real money.
Start Trading with Small Positions:
A major benefit of trading on small positions is that beginner traders can easily manage their losses. Yes, the profit margins may be less on small positions, but they’ll save your account capital in the long run.
Also, beginner traders shouldn’t use high-leverage accounts on small equity. High-leverage accounts do offer better profits, but they may also wash out your capital in case of losses.
Put Stop Loss and Take Profit on Your Trades:
Not just beginners, every trader should get help to stop loss and make a profit. It’s because a stop loss automatically closes the opened positions to minimize the loss on a trade. Similarly, taking profit helps you to capture the best possible profit margins on a position.
Develop a Strong Trading Psychology:
To develop a strong trading psychology, you should always trust your strategy, understand FOMO (fear of missing out), and control your greed and emotions. Also, it’s best to bear a small loss instead of going for a revenge trade, because you may end up losing more money.
What Factors Affect Forex and Stock Markets?
A forex trader needs to understand the macroeconomic factors of a country because they may directly impact the market. Below are some major factors that affect the forex market:
- Economic Indicators:
The economic indicators such as the GDP, inflation, and tax rates of a country directly impact its currency.
- Interest Rates:
Higher interest rates in a country are favorable for foreign investors. As they invest in a country, its currency gets stronger.
- Political Stability:
The political stability in a country directly translates to the country’s economic prosperity, which consequently empowers the currency.
- Global Events:
Global events such as wars, natural disasters, or geopolitical factors may affect a country’s currency.
A stock broker should watch out for the below technical and fundamental factors as they may change a stock market’s direction in no time:
- Company-Specific Factors:
Major industry events such as mergers, acquisitions, and more bring volatility to the stock markets.
- Unemployment Rate:
A high employment rate in a country indicates a healthy environment (ambiente saludable) for companies to do business.
- Supply and Demand:
The supply and demand of a stock may force the stock market to drive in a specific direction.
- Tax Policies:
Favorable tax policies may motivate internal and external investors to invest in the market, which may lead to the country’s stock market growth.
Winding Up: Major Differences Between Forex and Stock Markets:
Below is a detailed table of how forex and stock markets differ:
| Factors | Forex Market | Stock Market |
| Market Hours | Closes only on weekends | Follows local business hours |
| Market Size | One of the largest financial markets in the world | Smaller than the forex market. |
| Assets Traded | Currency pairs and commodities | Stocks, EFTs, debt securities, and derivatives. |
| Market Control | Decentralized market | Centralized market |
| Liquidity | High | Low |
| Volatility | High | Low |
| Leverage | Yes | Yes |
| External Influence | Yes | Yes |
