Similarities And Differences Between Currencies & Equities
Different asset classes have got very similar aspects of them. This means itâs important to trade the asset class that you understand best to provide you with the best chance of successfully investing in the capital markets. Furthermore, with the basics that move both the crypto and equity markets, itâs important to understand the differences in how stable they both are in order to get the most out of them with each asset class.
Differences between currencies and equities
Equity markets can be micro. Most shares have a high beta which means that they move at the same tie with broader indices for the majority of the time. However, firms have separate valuations, earning releases are in many cases path altering for a stock price.
The general stocks will have a much higher stability compared to currency pairs. The S&P 500 has an average stability of 15% whereby the EUR/USD implied stability is closer to around 7%. In times of stress, for example, earlier this year in January, the implied volatility on the S&P 500 reached around 50%. Because the stability of currency is a lot lower than the stability of the stocks. However, the leverage supplied to investors by brokers is a lot lower for stocks than currency pairs.
Simliarities between currencies and equities
Both of the markets are equally global and local. When using Vestle to trade the US dollar against any other major currency, the global forces will alter the future path of the currency pair. Moreover, the country has local problems which will spark flippancy. A good example is the current EU negotiations occurring the UK and the Italian budget will be forces which both drive the Euro and the Sterling.
This is similar for equities as the markets are somewhat connected and when there is sell off the United States then this will affect Asia and a sell off will happen there too.
The equity markets are affected by the currency markets and the same goes for the other way around. When the dollar goes up, small-cap US stocks will outperform large caps due to big cap multinational organisations having exposure through the world and a stronger dollar makes their products not as competitive in any country that isnât the United States.
According to ZyCrytpo:
âRising yields can also be a factor. As yields in one country rise relative to another, the currency of the higher yielding interest rates generally outperforms the lower yielding countryâs currency. Higher yields are generally negative for stock prices. Rising interest rates make future discounted cash flows less attractive which can weigh on stock prices.â
What are your thoughts? Let us know what you think down in the comments down below!