This article looks at the differences between the stock market and the forex market.
You will find a range of differences if you compare forex to stocks. Some of them may be favourable, however some will be unfavourable. There are many traders who move from the stock market to the forex trading market because of the high liquidity in the foreign exchange market.
Differences in Markets
The number of trading options in the markets is a big difference. The forex market has few trading options compared to the thousand of possible trades in the stock market. Foreign exchange traders focus on seven currency pairs. Four of the pairs are the majors and this includes the US dollar, with the Euro, Japanese yen, Swiss franc and British pound. There are commodity pairs that are quite popular which includes the US dollar, with the Canadian, Australian and New Zealand dollars. All the other pairs that are traded are various combinations of the currencies mentioned which are known as cross currencies. Some traders opt for exotic pairs, but this is rare.
The limitation this imposes makes it easier to follow the trends in the forex market. In the stock market, you need to make a choice between thousands of stocks to find the best choice. Forex traders need to keep updated on the economic and political news related to about eight countries.
Regulations and Trading
In the stock market you often experience quiet periods which decreases activity and shrinks the trading numbers. When this occurs, you may have difficulty opening and closing positions at the point you want to. When the markets are in decline, the investors and traders with ingenuity and a bit of luck are the ones who are able to carry out profitable trades. It is extremely difficult to short-sell stocks in the market because of the strict regulations and rules that apply.
The forex trading market makes it easier for traders to trade in both rising and declining markets. Since you are purchasing and selling at the same time, it makes short-selling a part of each trade you do. The high liquidity in this market provides the opportunity for traders to enter short positions without the need to wait for an uptick.
Margins and Leverage in Stocks and Forex
The market liquidity makes for low margins and high leverage in the foreign exchange market. When you are trading stocks, it is virtually impossible to find such low margins. Most of the stock traders are required to have an amount equal to at least 50% of the total investment available in their account. In the forex market, you require as little as 1% of your total investment in your trading account.
The cost of commissions is normally much higher in the stock market than in forex. Stockbrokers regularly request commissions, along with spreads, plus extra transaction fees which need to be paid to the exchange. Forex brokers normally earn their living by the spread. It is not necessary for traders to pay commissions along with the spread. There are also no transaction fees as there is no central exchange in this market.
It would appear that the forex market has won the war of comparison as there appears to be more advantages with forex over stocks.