If you are interested in trading currencies online, you will find that the forex market is significantly different from the stocks market. The foreign exchange (Forex) market is a place where currencies of various nations are constantly bought and sold by people across the local and global markets. This is quite similar to a stock market, where investors buy and sell shares and their derivatives.
Today's investors and active traders have access to a growing number of trading instruments, from tried-and-true blue chips and industrials, to the fast-paced futures and forex markets. Deciding which of these markets to trade can be complicated, and many factors need to be considered in order to make the best choice. The most important element may be the trader's or investor's risk tolerance and trading style. For example, buy-and-hold investors are often more suited to participating in the stock market, while short-term traders, including swing, day and scalp traders, may prefer markets where price volatility is more pronounced.
Deciding whether to trade stocks, foreign exchange or futures contracts typically comes down to risk tolerance, account size and convenience. The forex market is the world’s largest financial market, accounting for more than $5 trillion in average traded value each day. Traders like its high liquidity, round-the-clock trading, and the leverage it affords, which can be as high as 500-to-1. This is not the case with Stocks market where stocks brokers usually offer leverage access of only 2-to-1.
Forex vs Stocks Differences
- Trading Time
- Trading Education
- Trading leverage
Some sees foreign exchange (forex) market a very similar to other financial markets. It is true that forex trading shares many characteristics with the stock exchange, but they also have a number of differences that distinguish forex and the stock markets from each other. The forex market allows individuals, companies, banks, governments and nations to take advantage of currency fluctuations in the world market to profit from judging the correct direction a currency moves against another currency.
Both the stock market and the forex market operates in a strict schedule. Most stock market operates for 8 hours and then closes until the next morning when it open for trading again. For example, the Australian Securities Exchange (ASX) trading hours is between 10 am until 9:30 pm Sydney Time. In contrast, there is no downtime in forex trading. The forex market operates 24hours a day in 3 shifts, throughout the entire year. You can choose between the US, Asian or Europeans forex trading hours, although they do overlap and thus, allows for currency trading day or night.
Forex, unlike the stock markets, are not geographically tied down. It is in fact considered an over-the-counter (OTC) exchange. It can be conducted on a location best suited to the demand and convenience of the trader. Some forex outfits, even allows for mobile trading. On the other hand, stock markets are centralized. This means that it is located mainly in one place like New York Stock Exchange (NYSE), in where all trades are entered or exited.
The stock market always require a middleman, which thus results to more financial friction (fees). Every time a stock is sold, a middleman may it be a broker or some other entity, is always standing between buyer and seller. They make money just to facilitate the trade. The same is the case every time a stock is bought. That is not the case with forex trading. In forex market a trader can buy or sell directly by spot trading because the forex market is not centralized. But there are of course, forex brokers. But the edge is, in forex market the spreads are transparent. Besides, most brokers don't require additional transaction fee or even charge a commission.
When you think about it, forex trading boils down to tracking just 4 major currency pairs. Of course, one could argue that in forex trading you got to do a lot of formulation and study for a sound forex market analysis. On the plus side, many web sites offers forex education resources and forex tips for free. Compare this to keeping tabs on thousands of stocks in the stock market. In forex markets currency traders has the advantage of using forex systems. These systems help a currency trader in determining the best time to sell, or buy a currency pair.
In stock trading, you can trade with leverage 2:1 usually, and you have to fill out an application and be approved, and there are very specific regulations on who can trade with leverage, etc. Forex trading is very different. To qualify to trade with leverage, you merely have to open a forex trading account, and you are set to trade on margin. In the United States, you will be stuck with 50:1 leverage, but in other countries you can get as much as 500:1 leverage for your trading. Regardless of the amount of forex leverage you can use in your country, it is going to be so much more than you would have been able to use in stock trading.
Volatility is a measure of short-term price fluctuations. While some traders, particularly short-term and day traders, rely on volatility in order to profit from quick price swings in the market, other traders are more comfortable with less volatile and less risky investments. The demand for currencies is unlikely to diminish even if the forex market for that currency is weakening. So, there will always be buyers for your currency, making extreme volatility a very rare occurrence in the forex market. This is not the case in the stock market, where the demand for a stock is dependent on market sentiments.
The internet and electronic trading have opened the doors to active traders and investors around the world to participate in a growing variety of markets. The decision to trade stocks, forex or futures contracts is often based on risk tolerance, account size and convenience. If an active trader is not available during regular market hours to enter, exit or properly manage trades, stocks are not the best option. However, if an investor's market strategy is to buy and hold for the long term, generating steady growth and earning dividends, stocks are a practical choice.