The rise in financial markets has opened up investment opportunities for a variety of asset classes. Assets like stocks and currency have always been a popular choice and played a significant role in the development and expansion of major market economies.
The foreign exchange market's role is to determine the currency value, but stock markets are used to raise capital in exchange for partial ownership. These financial markets are interconnected in many ways, but there's a big difference between stocks and forex.
Let's find out more about them to better understand their potential investment opportunities.
Factors that affect the Forex market
Currency Inflation : While there are many factors that can impact both stock and currency movements simultaneously, certain factors have a greater effect on the currency market. The currency's value is affected by the economy's inflation rate. According to research, countries with lower inflation tend have higher purchasing power.
Over the years, countries such as the US, Japan and Germany have managed to reduce inflation. Every country releases its inflation numbers on a regular basis. This almost immediately impacts the exchange rate.
Interest Rates The central banks review the benchmark rates on a regular basis. The rates in India are reviewed every two months. To maintain stable exchange rates, the central bank changes the policy rates, which forex traders closely track because it has an impact on inflation and therefore the currency value.
Current account Deficits : If a country has a current accounting deficit , its exchange rates will fall. This is because it spends more money on foreign trade than it earns.
The country's credit rating has a huge impact on the exchange rate. Inflation is caused by higher public debt. A high level of debt can also lead to inflation.
Stability - Foreign investors are more likely to invest in stable economies. Another important factor is the political climate. A strong and stable government will increase confidence in the country's currency.
While all the factors that affect the currency market have an impact on the price movements in the stock exchange, it is the corporate performance that is more important for making a buy or sell decision.
Corporateearnings The ultimate driver of stock price or the primary driver for stock prices is the company's ability to grow and pay dividends. To assess a company's financial position, quarterly numbers are closely monitored.
News: News flows throughout the day impact the price. A news story about a merger or acquisition could impact the price of a listed company, while mismanagement stories in newspapers could affect the stock prices. News about other economies can have an impact on prices, as the stock market is interdependent.
Market mood: The stock market's most important factor is the market sentiment. The new field of behavioural finance is gaining popularity. Because the market is not always controlled by hard numbers, price movements can be unpredictable. For example, traders tend to react more to certain news pieces than to others and ignore other information.
Liquidity : Liquidity plays a significant role in determining the price. High liquidity is a hallmark of blue chip companies. Stocks that have high liquidity are more open to material news.
Macro: The macroeconomic condition of a country is one of the largest drivers of growth. It is so important that the stock exchange is often considered a measure of economic growth. The stock market should not be confused with real economic growth. In the short-term, there have been several times when market movements and economic growth seemed to be unrelated.
Is forex more profitable than stocks?
Volatility : The short term price fluctuations are referred to as volatility. Stock markets are notoriously volatile. However, blue stocks are less volatile than other stock markets. Investors who prefer to invest in a buy-and-hold style are likely to favor blue stocks. Forex traders, on the other hand, prefer volatile markets to earn good returns. Short-term day traders are often attracted to forex markets.
Stock Trading Hours: Stock trading hours in India run from 9:00 a.m. until 3.30 p.m. The markets are also closed on Sundays and public holidays. Forex markets, however, are open 24 hours a day. The forex market allows for more flexibility when it comes to timing. Forex market is a better option than the stock market for traders who want to be able to access markets around the clock.
Trades in currency or stocks are influenced by the goals of an investor or trader, as well as their availability of funds and time. It is not a good idea for you to invest in stocks if you aren't available at the opening, closing, and pre-opening times. Stock market trading is a good example of a buy-and-hold strategy. For investors who are looking for flexibility in their work hours, the forex market may be a better choice.