Two of the biggest financial markets that are traded on a daily basis are equities and foreign exchange. These two terms dominate the news and discussions almost every day. A lot of the times, the two markets are compared by traders to find out which one is the most profitable. While stock trading is the more traditional instrument, forex has seen some of the biggest success stories in trading as well. Let’s take a look at how these two markets differ in the Indian market context.
Stock (Equities) Trading In India
Over the decade of the 1990s, the Indian stock market enjoyed a complete transformation of the market design. A new risk management institution, the clearing corporation, was successful in largely eliminating settlement risk. The depository was established which eliminated the operational vulnerabilities associated with physical share certificates. Derivatives trading came about, and within roughly a year after commencement, the stock index futures market was more liquid than the underlying stock market. All stock exchanges in India switched to order matching by computers. This worked extremely well compared with market designs based on human market makers, utilised previously.
- The equity market featured heavily in the public imagination in the early 1990s thanks to the famous “stock market scam” of 1992. This was a somewhat unfair characterisation, insofar as the malpractices on the Indian government’s bond market where at least as important as those on the stock market. However, this helped generate interest on the part of policymakers in new designs of the equity market.
- The Bombay Stock Exchange and the National Stock Exchange are the main stock markets in India. Indian users can open an account with an Indian stockbroker or with an international broker that has access to these markets.
Forex Trading in India
The awareness regarding the FX market in India is low compared to that of stock trading. This is largely because of the nature of the market in the country. It has been a highly regulated market where the Indian government-controlled exchange rates, Foreign direct investments policies and export-import policies till 1993. Although the market has been largely liberalised since then, the Reserve Bank of India still intervenes from time to time.
- The Securities and Exchange Board of India(SEBI) and the Reserve Bank of India(RBI) are in charge of all FX activity in the country. Check out the detailed rules on trading activity in the country by visiting https://www.sebi.gov.in/ and https://www.rbi.org.in/
- Traders based in India can only access brokers regulated by the SEBI. To bypass this, many Indian traders use local deposit methods offered by international brokers to use their services.
- Indian traders have to pay a conversion fee when they ultimately cash out as they can only use INR for that purpose.
Pros and Cons of Stock Trading (Equities)
Pros
- The Indian stock market presents an amazing opportunity for growth as its a developing economy. The market generally goes into panic mode when people base their decisions on emotions instead of logic. Smart traders can use this opportunity to secure some amazing bargain stock deals.
- Indian stocks have performed much better than other markets in the country and also beats inflation on multiple occasions.
- SEBI is responsible for regulating and governing the Indian stock markets. It protects stakeholder interests from a fraudulent company or activity.
Cons
- The Indian stock market is dynamic and volatile. Share prices can plummet and spike multiple times within a single trading day. It can also take years to recover following the aftermath of a market crash.
- Indian stock markets are heavily affected by global economic meltdowns.
- Brokerage fees, especially those under SEBI regulations can be steep for some traders.
Pros and Cons of Forex Trading
Pros
- The overall proliferation of internet connectivity in India, especially in the last decade has allowed many Indian citizens to look at online forex platforms to access the market. A lot of these are international brokers that provide local deposit payments for their Indian clients.
- The FX market is full of liquidity, especially the major currencies. It is also the reason why the FX markets provide more opportunities compared to other financial markets.
- The FX market is also less susceptible to insider price manipulation compared to the stock market. The only inside information regarding currency movements come from officials in the government of the central bank in a transparent environment.
Cons
- Because of the degree of volatility involved, FX traders may be exposed to losses due to unexpected volatility at times.
- Traders in the FX market can benefit from holding positions overnight via interest.
- Counterparty risk always exists where the counterpart fails to deliver a currency used in a big FX transaction.
Differences Between Equities And Forex Trading
Forex trading vs equity trading in India is a highly debated topic that has divided the Indian as well as the global trading community for quite some time now. Both the instruments have their pros and cons, However, those looking to choose between the two should be aware of the clear differences in these markets.
Trading Time
The trading time for the two markets is different as the FX market operates on a 24/7 basis, whereas stock exchanges have fixed timings. While forex traders can log into their trading platforms almost at any time they wish, stock traders have to adhere to rigid stock exchange timings. The FX market thus provides more opportunities for traders to capitalise on certain moves no matter when they occur.
Trading focus
Another aspect that differentiates the two markets is the scope of a trader’s focus. The scope of stock trading is narrower compared to FX trading. This is largely because traders only have to concentrate on factors that directly influence a company’s stock, such as debt levels, cash levels and earnings guidance.
On the other hand, currencies reflect the aggregated performance of a country’s whole economy. This means traders have to focus more on macroeconomics. They thus have to focus on wider factors such as GDP, inflation rate and unemployment rate when selecting a currency pair to trade with.
Currency dependency
Whenever you trade currency pairs, a minimum of two countries and their currencies are involved. Since there are references to many different currencies while trading FX, the dependency on a single currency is much less.
When it comes to the Indian stock market, however, every transaction will be based on the INR. This poses a problem as it is dependent on the value of INR and traders have to take notice of this factor at all times.
Leverage
Generally, the amount of leverage available in the forex market is high compared to the equities market, which gives fx traders a competitive advantage. Also, the movement across currencies is around 1% while that of equities or stocks is 10%. This means leverage is not always required while trading stocks to rake in a profit. However, it is almost impossible for forex traders to trade without leverage, as they need a multiplier to increase profits. However, more leverage also amplifies losses along with the opportunity for more gains.
Profit Potential
When trading forex, intraday trading can help growth capital easily by a couple of hundred per cent. However, this also increases the chances of receiving a margin call.
On the other hand, stock traders can grow their capital more modestly at around 20% within a few days.
Final Thoughts
Ultimately, the decision of whether to go for stock (equities) trading or forex trading largely depends on the trader’s risk appetite as well as accessibility. The main advantage of stock trading in India is awareness and accessibility, as people are more familiar with how to aces the market locally. On the flip side, because of the limitations of forex trading in India, many people are discouraged. However, traders who can take these limitations into account and access international brokers can benefit from the global fx market.