Forex and Stock Trading have been two different markets for a long time. However, there is some overlap between them as well. A lot of people wish to know the difference between forex and stock trading in Australia. Both forms of trading have their own set of rules and risks. However, they have a lot of similarities between them as well.
An important thing to note here is that the word “stock” in the stock market means equity shares, but stocks refer to currency pairs when it comes to forex. Saxo Bank offers trading opportunities in both the forex and stock market.
What is the Difference Between the Two?
One on One or Multiple
Stock trading is a one on one buying and selling process. If you are entering the stock exchange, it means that you are directly looking to buy or sell stocks. On the other hand, forex has multiple participants compared to stocks that are limited to only two parties.
Currencies vs Stocks
Both types of trading involve financial instruments with prices that go up and down, but they remain different because currency pairs can be used as an asset class. In contrast, stocks cannot be accumulated for currencies, nor do they have any intrinsic value whatsoever. Stocks represent ownership rights in companies, while currency rates give rise to monetary issues managed by central banks across various countries worldwide. Stocks are not money, but they can be bought and sold for money, whereas currencies themselves are considered as money.
The price volatility in forex is not like that of stocks. The stock market has witnessed big crashes several times throughout history, but the forex market remains stable, barring a few cases such as Brexit and election results worldwide.
Minimum Transaction Amounts
The minimum transaction amount required by stock traders is $100,000, while forex requires a lot less than that. The minimum amount required is about $50, making it easier for Australian investors who do not want to put all their eggs in one basket.
While trading in stocks, investors can use leverage to purchase stock on margin to profit from the potential rise in the stock prices resulting from their buying and selling activities. On the other hand, some brokers provide traders with leverage when it comes to trading on forex, but this is subject to the margin requirements set by various regulatory bodies across different countries worldwide.
Rewards and Risk Ratio
Investors always look for high returns for taking high risks while trading on forex or stocks. However, this ratio differs when it comes to both forms of trading. If we try to understand this correlation better, we will realize that you have to take at least ten units of risk for every one unit of reward that you get in stock trading. On the other hand, the ratio for forex trading is 20, which means that if you are looking to make a quick buck, then it is better to go with foreign currency trading; otherwise, you could be left destitute.
The settlement period for stocks is T+3 which means that if you have bought a stock today, then the seller will receive the money in three days. But when it comes to forex trading, cash transfers are done daily, so the actual selling and buying of currencies happens within two business days after initiating a trade.
While stock trading in Australia is subject to capital gains tax, Forex trading has no taxation whatsoever. The only case where taxes are applicable is when currency transactions cross over the personal income tax limit set by various governments across different countries. Also, currency traders can avail exemptions from paying taxes under certain conditions.
The Forex Market is highly liquid and traded at high volume. At the same time, liquidity in stocks depends upon various factors such as market capitalization, company size and the sector o it belongs. In addition to this, due importance needs to be paid to daily volume, average trading volume per month and the number of shares outstanding, among other things. Also, some companies have more than one class of stock, making it even more challenging for investors to trade stocks.