Difference between forex and indices

A Wealth of Knowledge

Yonela Ngulugulu and WikiVisor 12 Sep 2017

In forex one is trading one currency pair against another, whereas when one is trading the indices they are trading a composite of several companies...


Forex is a foreign exchange market where one can trade a currency against another for instance: EUR/USD. In this case, you are trading the Euro against the U.S Dollar. This is like, buying shares on a country's economy. Whereas indices refer to an index of companies. This is a composite of companies in a country.

SAMPLE INDICIES

For example the SA 40 (also known as the JSE 40). This is a collection of top 40 companies in South Africa. Another example would be that of Dow Jones, which is an index of 30 US companies. This was created by Charles Dow hence the name Dow Jones. Other indices include: the S&P 500 (top 500 companies in the U.S ), CAC, German Dax (compilation or composition of top companies in Germany), Nasdaq, Nikkei (Composition of top companies in Japan) and so on.

So an increase in a single company's earnings would impact on the share price of that index as a whole. Also, a positive financial outlook of a company, rise in quarterly profits, etc will also have an impact on that index in which that particular company is listed in. Whereas in terms of the forex market the overall growth of a country would be indicative of a growing economy and would be good for that particular currency. Another thing to note is the spreads. The forex market has low spreads in comparisons to the indices market. Also, the indices are traded through a central authority board like the JSE, NYE, LSE and so forth. The indices market will tend to move during specific market times. Say when the stock exchange opens and will tend to slow down in the evenings when it closes depending on the index one is trading and the time zone it is in.


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