Forex Trading

The foreign exchange market is a global decentralised marketplace where currencies are traded. Participants include banks, financial institutions, corporations, governments, and individual traders.  

Currency pairs represent the exchange rate between two currencies. The most commonly traded pairs include EUR/USD (Euro/US Dollar), GBP/USD (British Pound/US Dollar), and USD/JPY (US Dollar/Japanese Yen). Each pair consists of a base currency and a quote currency, with the exchange rate indicating how much of the quote currency is needed to purchase one unit of the base currency.  

Forex trading operates 24 hours a day, five days a week, across major financial centres worldwide, including London, New York, Tokyo, and Sydney. This continuous trading cycle allows for around-the-clock trading, providing ample opportunities for market participants to engage in buying and selling currencies.

What moves prices

There are many factors that contribute to the volatile price movements. Economic indicators play a significant role, including interest rates, inflation rates, gross domestic product (GDP) growth, employment figures, and trade balances. Central bank policies, such as monetary policy decisions and interventions in currency markets, can also impact currency valuations.  

Geopolitical events and developments, such as political instability, trade tensions, and conflicts, can cause sudden shifts in investor sentiment and currency flows. For example, the current conflicts in Ukraine and Gaza.  

Market sentiment, driven by speculation, fear, and greed, can lead to short-term fluctuations in currency prices. Traders often employ a combination of fundamental and technical analysis to anticipate market movements and make informed trading decisions in the dynamic forex market environment.

Stock Trading

Stock trading involves buying and selling shares in publicly traded companies. In the United States, this typically occurs on stock exchanges like the New York Stock Exchange (NYSE) or the Nasdaq stock market.

When someone buys shares of a company, they effectively become a small part-owner of that company and have some claim on its assets and earnings, in the form of dividends and/or capital appreciation. The value of the shares depends on a variety of factors, including the company’s financial performance, outlook, overall market conditions, and investor sentiment.

Key Takeaways

• Stock trading involves buying and selling shares of publicly traded companies on stock exchanges.

• Types of stock traders include long-term, short-term, day trading, swing trading, and high-frequency trading, with each having a different time horizon and goal.

• Stocks are typically categorized based on company size or market capitalization, industry, and growth vs. value opportunities.

• Trading stocks involves risk, including the chance that you might lose up to your entire investment.

Types of Stock Trading

Stock trading and the people who do it come in many varieties and feature myriad strategies and approaches. Often, stock trading is categorized based on one’s desired holding period, or time horizon.

Long-term trading involves buying shares of a company and holding onto them for an extended period, usually several years or even decades. The goal of long-term trading is to benefit from the growth of the company over time and to earn dividends on the shares. Long-term buy-and-hold traders are often categorized more as investors but may also be called position traders.

Short-term trading, on the other hand, involves buying and selling shares over a briefer period of time—usually a few days, weeks, or months. The goal of short-term traders is to make quick profits by taking advantage of market fluctuations. Day traders have an intraday time horizon, making several trades over the course of a single day or a few days. Swing traders have a more medium-term outlook, looking to capture trends and momentum over several weeks or months.

Ultra-short-term traders may employ algorithms to help them place trades in milliseconds to “scalp,” or make a series of small but quick profits. Also known as high-frequency traders (HFTs), they use computer programs to execute trades based on preset criteria. While high-frequency trading is usually the realm of professional Wall Street traders and hedge funds, algorithmic platforms are becoming increasingly available to ordinary traders.

There are more than 5,700 stocks listed on the NYSE and Nasdaq alone, and many thousands more listed over the counter (OTC).12 As a stock trader, you will want to narrow this universe down. Most brokerage platforms have filters and screeners that allow you to do that.

In general, stocks are categorized based on market capitalization, industry, and whether they present growth or value investing opportunities.

Market Cap

The market cap of a company represents the value of its shares multiplied by the number of shares it has outstanding. In general, stocks with bigger market caps represent larger, more mature, and stable companies with less growth opportunity but also less volatility. On the other hand, small-cap stocks tend to be riskier but can provide more long-term growth.

Usually, a stock’s market cap can be segmented as:

• Mega cap: Market cap of $200 billion and greater

• Big (large) cap: $10 billion and greater, up to $200 billion

• Midcap: $2 billion to $10 billion

• Small cap: $250 million to $2 billion

• Microcap: $50 million to less than $250 million

• Nano cap: Less than $50 million3

Industry Sector

What companies do and the industry they work in typically will be reflected in the performance of their stocks. For instance, a consumer staples stock (meaning shares in a company that makes goods essential to consumers) will tend to fare well in a recession because people will always need their products. A consumer discretionary stock (for example, luxury items), on the other hand, may suffer as consumers cut back on optional purchases when the economy falters.

A company’s industry classification, known as its Global Industry Classification Standard, or GICS code, is a critical tool for an investor whose aim is to create a diversified portfolio, or for identifying competitors of a company in the same industry. GICS codes define 11 economic sectors.

These are further divided into 25 industry groups, then into 74 industries, and finally into 163 subindustries. Each stock has a code to identify it at all four of these levels in terms of the company’s principal business.4 The 11 stock market sectors are:

• Communication services

• Consumer discretionary

• Consumer staples

• Energy

• Financials

• Healthcare

• Industrials

• Information technology

• Materials

• Real estate

• Utilities

Growth vs. Value

Growth stocks are shares of companies that are expected to grow faster than the overall market due to their potential for innovation, expansion, or disruptive technology. These are often smaller-cap and newer companies.

Value stocks are shares of companies that are perceived to be undervalued by the market and have strong fundamentals. Value traders look for stocks with solid fundamentals, such as low price-to-earnings (P/E) and price-to-book (P/B) ratios as indicators of their financial strength relative to their market price. Value stocks also may pay higher dividends.

ETFs

Exchange-traded funds, commonly known as ETFs, trade like shares of stock, but each ETF share represents holdings in several different stocks. ETFs offer traders a way to gain access to an entire industry sector, broad market index, or asset class using a single instrument.

Where to Trade Stocks

Stocks are listed on one or more exchanges, or they can be traded on over-the-counter (OTC) markets. Exchanges such as the New York Stock Exchange (NYSE) and the Nasdaq stock market in the U.S. provide a centralized marketplace for buying and selling stocks, and they set the rules and regulations for trading activities.

OTC trading takes place away from stock exchanges and can occur via electronic communication networks (ECNs) or through dealers who specialize in a particular type of security or market segment, like the OTC Markets Group Inc. OTC trading is typically reserved for smaller or less well-known companies (often in the form of so-called penny stocks), shares of some non-U.S. companies, or securities that don’t meet the listing requirements of major exchanges.5

OTC trading carries some particular risks, such as reduced transparency and liquidity, as well as the potential for fraudulent activity. Therefore, traders need to exercise caution and conduct thorough research before trading OTC stocks or other securities.

Most brokerage firms today give their users access to exchange-traded and OTC stocks.

How to Trade Stocks

To start trading stocks, individuals need to open a brokerage account with a reputable broker. A brokerage account is a type of investment account that allows investors to buy and sell stocks, bonds, and other securities.

Once the account is set up, traders should start researching companies and analyzing their financials to make informed investment decisions. It’s also wise to set a budget for trading and to invest only the amount of money that you can afford to lose. When ready, traders can then place orders to buy or sell shares of a company through their broker.

There are several order types and specifications that a trader can use:

• A market order is the most basic type of stock order and instructs the broker to complete the order at the best available price. Market orders are generally always executed, unless there is no trading liquidity.

• A limit order seeks to buy or sell a stock at a specific price or better. Limit orders give the trader more control over the price they will pay to buy or sell a security. Limit orders can remain in effect until they are executed, expire, or are canceled.

• A stop order instructs the broker to buy or sell an asset once it reaches a specified price above or below the current price. A stop order can be a market order, meaning that it takes any price when triggered, or a stop-limit order that can only execute within a certain price range (limit) after being triggered. Stop orders are often used to minimize losses (stop-loss).

• A day order must be executed during the same trading day when the order is placed.

• Good-’til-canceled (GTC) orders remain in effect until they are filled or canceled.

• Immediate or cancel (IOC) means that the order only remains active for a very short period of time, such as several seconds.

• An all-or-none (AON) order specifies that the entire size of the order be filled, and partial fills won’t be accepted.

• A fill-or-kill (FOK) order must be completed immediately and completely or not at all, and it combines an AON order with an IOC order.

Stock Trading Risks

It is important to note that stock trading involves risks, and investors should be prepared to lose money. Stock prices are subject to fluctuations caused by various market factors, including macroeconomic conditions, geopolitics, and global events. This is known as market risk or systematic risk because it affects the entire stock market.

Liquidity risk refers to stocks that have low trading volume or weak demand that can make them difficult to sell quickly. This can result in losses if the trader needs to liquidate a stock position.

Individual stocks also can lose money due to sector- or company-specific news and events, such as an earnings miss vs. analysts’ forecasts or impending bankruptcy. As such, this is called specific risk (or unsystematic risk). This can result in significant losses if the market moves against a trader’s position.

To manage these risks, investors should conduct thorough research and analysis, develop a well-defined trading plan, set risk management measures such as stop-loss orders, and stay disciplined in executing their strategy. Additionally, when you trade stocks, you should avoid investing more money than you can afford to lose and consider diversifying your portfolio to reduce overall risk.

How do I start trading stocks?

The first step to getting started in trading stocks is to open a brokerage account and fund it. There are several options for you to choose from online, many with commission-free trading in stocks and exchange-traded funds (ETFs). Also, set trading or investment goals, research companies, stay informed about market and company news, and start small to minimize risk and gain experience.

What does a stock trader do?

A stock trader buys and sells shares of publicly traded companies in the hopes of making a profit. They may do this either professionally or as a hobby. Traders study market trends, scrutinize companies, and use various strategies to make informed decisions. A successful stock trader must have strong analytical and decision-making skills, as well as a deep understanding of the market.

What is an example of a stock trade?

As an illustration, an investor buys 10 shares of Tesla (TSLA) at $200 per share using a limit order, with a maximum price of $210. The order is executed when the stock price reaches $210, and the investor pays a total of $2,100. A week later, the stock price rises to $300 per share, and the investor sells all 10 shares at market price, receiving $3,000 and making a profit of $900.

Can you trade stocks with $100?

Yes. Many discount brokerages allow investors to buy fractional shares in a company with as little as $100 or less. Thus, if a share of a company’s stock is trading at $200, $100 will buy you half a share. Moreover, many online brokers today offer commission-free stock trading, meaning that your $100 investment won’t be reduced by trading commissions.

What is technical analysis?

Technical analysis is the study of historical market data, including price and volume. Using insights from market psychology, behavioral economics, and quantitative analysis, technical analysts aim to use past performance to predict future market behavior using chart patterns and statistical indicators.

The Bottom Line

Stock trading involves buying and selling shares of a public company. Trading can be an exciting and lucrative opportunity, but it also involves risks that investors should be aware of, including the possibility of losing significant amounts of money. Therefore, it’s important to conduct thorough research and analysis before making any investment decisions.

Forex vs. Stocks

Before diving into the specifics, it’s essential to understand the basic structure of the Forex and stock markets.

The Forex market, or Foreign Exchange market, is the largest financial market in the world, with a daily trading volume exceeding $7 trillion. Forex trading involves the buying and selling of currency pairs, such as EUR/USD or GBP/JPY, where traders speculate on the exchange rate movements between the two currencies.

The stock market, on the other hand, involves the buying and selling of shares of public companies. When you buy a stock, you purchase a small ownership stake in that company. The stock market is significantly smaller than the Forex market, but it is still vast, with major global exchanges like the New York Stock Exchange (NYSE) and NASDAQ facilitating trillions of dollars in trades daily.

Trading Hours

One of the most significant differences between Forex and stocks is the availability of trading hours.

The Forex market operates 24 hours a day, five days a week, thanks to its global nature. Trading starts in Sydney, moves through Tokyo then London, and ends in New York. The difference in time zones of these major global financial centres allow for practically round-the-clock trading during weekdays. This 24/5 availability makes Forex a very flexible market for traders no matter their geographical location or time availability.

Stock markets are typically open for trading during regular business hours for the specific exchange. For example, the NYSE is open from 9:30 AM to 4:00 PM EST. While some after-hours trading is available, it is limited and often comes with lower liquidity and higher spreads.

If you prefer the flexibility to trade at any time of the day or night, the Forex market may be more suitable. The stock market on the other hand is more structured and is suitable for traders who prefer the routine to trade only during clear business hours.

Liquidity and Market Size

Liquidity refers to how easily an asset can be bought or sold without affecting its price. Both Forex and stocks offer liquidity, but the scale and implications differ.

The Forex market is the most liquid market globally, with major currency pairs like EURUSD often seeing daily trading volumes in the trillions. This high liquidity ensures that trades can be executed quickly with minimal slippage and low spreads (the difference between the bid and ask prices).

While the stock market also offers liquidity, it varies greatly depending on the stock or exchange. Large-cap stocks like Apple or Amazon are highly liquid, with millions of shares traded daily. However, smaller, or less popular stocks may have lower liquidity, leading to wider spreads and potential difficulties in executing large orders without affecting the price. Big exchanges such as the Nasdaq and NYSE are also more liquid compared to lesser-known exchanges in relatively smaller countries.

For traders who prioritize quick trade execution and tight spreads, the Forex market’s liquidity is unparalleled. However, for those interested in long-term investments in specific companies, the stock market offers ample opportunities with varying levels of liquidity.

Volatility

Volatility is a measure of how much the price of an asset fluctuates over time. It can present both opportunities and risks for traders in both markets.

The Forex market tends to be more volatile than the stock market due to the influence of global economic events, geopolitical developments and central bank policies. Currency pairs can experience significant price swings within short periods, creating opportunities for traders to profit from these movements.

Volatility in the stock market can vary greatly between different stocks. Factors such as earnings reports, company news and broader economic indicators can cause sharp price movements for individual stocks. However, the overall stock market tends to be less volatile than the Forex market, which is influenced by a broader range of global factors.

Traders who thrive in fast-paced, dynamic environments may find the volatility in the Forex market appealing. Conversely, those who prefer more stable and predictable price movements might lean toward trading stocks, especially blue-chip companies with a history of steady performance.

Leverage

Leverage allows traders to control a large position with a relatively small amount of capital. While both Forex and stock markets offer leverage, the levels and implications differ significantly.

One of the reasons Forex trading is popular is the high level of leverage available. In Forex, leverage ratios can be as high as 200:1 or even more, depending on the broker and the region. This means that with $1,000 of capital, a trader can control a position worth $200,000! It is however important to note that leverage amplifies both potential profits and potential losses.

Leverage in the stock market is generally lower, with typical leverage ratios around 2:1 or 3:1 for retail traders. This means that with $1,000, a trader can control up to $3,000 in stock. While this lower leverage reduces the potential for large profits, it also limits the risk of substantial losses, making it a more conservative option.

If you’re comfortable with higher risk and the potential for significant returns, Forex trading with high leverage might be attractive. However, if you prefer a more controlled environment with lower risk, stock trading with limited leverage could be the better choice.

Transaction Costs

Transaction costs can significantly impact your overall profitability in trading. It’s important to understand the costs associated with trading in each market.

In the Forex market, the primary cost is the spread i.e. the difference between the bid and ask prices. Spreads in Forex are typically very tight, especially for major currency pairs such as EURUSD and USDJPY. This makes Forex a cost-effective option for traders. Some brokers may also charge a small commission per trade, but these costs are usually minimal compared to potential profits.

When trading stocks, transaction costs can include commissions, fees and spreads. Many brokers charge a commission per trade, which can add up, especially for active traders. Additionally, some stocks have wider spreads, which can increase the cost of entering and exiting positions. However, commission-free trading has become more common, reducing the barrier for stock traders.

Forex trading generally offers lower transaction costs, especially for frequent traders who benefit from tight spreads. Stock trading costs can vary, with commission-free trading making it more accessible, but spreads and fees can still affect overall profitability.

Risk Factors

Both Forex and stock trading come with inherent risks. Understanding these risks is essential for developing a successful trading strategy.

The Forex market is subject to various risks, but the primary ones are volatility risk and leverage risk. The Forex market can be very volatile, with huge price swings exposing traders to high risk in the market. This risk can further be amplified by leverage. Forex traders manage risk by utilizing tools such as stop-loss and take-profit orders, an economic Calendar, monitoring pending orders, effective position sizing, as well as choosing the best hours to trade.

Stock trading carries risks such as market, liquidity, currency, inflation and political risks, as well as company-specific risks. Some of the ways stock traders minimize risk include choosing quality stocks, portfolio diversification, dollar-cost averaging, as well as focusing on long-term investing.

Both markets carry significant risks, but the nature of these risks differs. Forex traders must be careful about volatility and leverage, while stock traders must be aware of company-specific developments and market conditions.

Indices Trading

Stock market indices, such as the S&P 500, play a pivotal role in providing investors with insights into the performance of specific segments of the financial markets. The S&P 500, for example, represents a diverse basket of 500 large-cap US companies, spanning various industries and sectors. These indices serve as benchmarks, allowing investors to gauge the overall health and direction of the stock market. Additionally, they facilitate portfolio diversification and asset allocation strategies by providing a broad overview of market trends and movements.

Stock market indices are calculated using weighted averages of constituent stocks' prices or market capitalisations. The weighting methodology varies depending on the index, with some indices employing market-cap weighting, where larger companies exert a greater influence on the index's performance, while others utilise price weighting or equal weighting.  

What moves prices

Changes in the prices of constituent stocks, driven by factors such as corporate earnings, macroeconomic indicators, and investor sentiment, impact the index's value.  

Indices are rebalanced periodically to reflect changes in market dynamics, ensuring their relevance and accuracy in tracking overall market performance. By tracking indices, investors can assess the performance of their portfolios relative to the broader market, identify trends, and make informed investment decisions based on market benchmarks.

Precious Metals Trading

Precious metals, including gold, silver, and platinum, have captivated humanity for centuries due to their inherent beauty, scarcity, and utility.  

Gold, often referred to as the "king of metals," holds a special place in history as a symbol of wealth, luxury, and stability. Its lustrous appearance and resistance to corrosion make it ideal for jewellery and ornamental purposes.  

Silver, known for its affordability and versatility, boasts a wide range of industrial applications, from electronics to medicine.  

Platinum, rarer and more precious than gold, is coveted for its durability and resistance to tarnishing, primarily used in catalytic converters, jewellery, and laboratory equipment. Together, these precious metals form the cornerstone of investment portfolios, serving as safe-haven assets and hedges against inflation and economic uncertainty.

What moves prices

The prices of precious metals are influenced by a complex interplay of supply and demand dynamics, along with various economic factors.  

On the supply side, mining production, exploration efforts, and recycling rates impact the availability of precious metals in the market. Geopolitical factors, including mining regulations, labour strikes, and geopolitical tensions, can disrupt supply chains and affect production levels.  

Demand for precious metals stems from diverse sources, including jewellery fabrication, industrial manufacturing, investment demand, and central bank reserves.  

Economic indicators, such as interest rates, inflation expectations, and currency valuations, also exert significant influence on precious metals prices. For instance, during times of economic uncertainty or inflationary pressures, investors flock to precious metals as store-of-value assets, driving prices higher. On the contrary, a strengthening economy or rising interest rates may dampen demand for precious metals, leading to price declines.  

Understanding these supply and demand dynamics, coupled with macroeconomic trends, is essential for investors and traders seeking to navigate the intricacies of the precious metals market.