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Differences Between Forex & Stock Options

Differences Between Forex & Stock Options - Introduction
Simply put, the difference between Forex and Stock Options is like the difference between a tiger and a horse... they are completely different things! Incredibly, there are many amateur trader-wanabes who actually think forex trading and stock options trading are the same thing and then end up hurting themselves by trading all the wrong things. Some traders who got hurt in forex trading actually misunderstand stock options trading to be the same thing and then completely missed a good investment and trading opportunity. This tutorial shall clarify the differences between forex and stock options trading.


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Differences Between Forex & Stock Options - What exactly is Forex?
The term "FOREX" comes from two seperate words "FOREIGN" and "EXCHANGE". Put together, it reads "Foreign Exchange". What exactly is foreign exchange? Foreign exchange in full reads "Foreign Currency Exchange". It is the trading of one country's currency (money!) for another country's currency. The value of one country's currency fluctuate in relation to the value of another country's currency non-stop, 365 days a year. Money is made in Forex trading when your opinion on how one currency will move in relation to another turned out exactly as planned.



Differences Between Forex & Stock Options - What exactly is Stock Options Trading?
Stock options trading is the trading of stock options. Stock options are financial instruments that give you the right to buy or sell certain shares in the stock market. Using the 2 kinds of stock options; Call Options and Put Options, options traders are able to profit when the underlying stock goes up or down and even when it is trading sideways.



Differences Between Forex & Stock Options - Comparison
Here's a comparison of some of the main differences between Forex and Stock Options:

Underlying Instrument
Forex is based on currency while stock options is based on stocks.

Complexity of Analysis
Because Forex trading is dependant on the movements of 2 different currencies while stock options trading is dependant on the movement of a single stock, analysis in Forex trading is more complex.

Leverage
Forex trading offers a much higher level of leverage than stock options trading, making it more risky that stock options trading in terms of leverage risk.

Trading Stress
Stock options trading takes place only during business hours and only during business days but forex trading takes place 24 hours a day, every single day, without any holidays or breaks. This makes trading stress much higher for forex trading.

By now, it should be clear that forex and stock options trading are two totally different things with their own trading characteristics. Forex should never be made a replacement for stock options trading and stock options trading cannot replace Forex as well. Both trading instruments serves different purposes and should find their place in every well diversified portfolio.


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