Compared to stocks, forex has many advantages, one of which is the fact that you don’t have to go over the list of more than 7,000 listed stocks in order to figure out which company to invest in.
In forex, there are dozens of currency pairs available, however the major most traded pairs come down to just 4. Instead of owning a piece of a company with stock shares and worry about company’s ability to make money, you keep an eye on currencies and catch profitable trends of the market.
Let’s go over some of the main differences between Stock versus Forex:
24 Hour Market
Both forex and stock markets are available 24 hours during the week. However, one of the exciting forex advantages over stocks is that forex brokers allow you to trade during US, Asian and European market hours and customize your own trading style.
While you can still trade EUR/USD pair even when European and American forex centers are closed (let’s say during Asian session), you cannot buy stock from Italian company which is listed in Italian stock exchange and not listed on Japanese stock exchange.
In order words, stock limits you to whatever the hours of the exchange are, while Forex trading gives you access to the market 6 days a week, 24 hours a day because there is no centralized exchange. This way you have a complete freedom to either get in or out of the currency positions.
Execution
In forex, market orders are processed instantly under normal market conditions. This means that you see the price you actually get when you execute an order.
Leverage Reviewed
Stocks only allow you to trade 2:1 leverage. Even for that, you have to fill enormous amount of applications and get approval.
In Forex, leverage up to 1:500 (and with some brokers even higher) is available to you from the moment you open a trading account. With high leverage, there are endless possibilities to make high profits with minimum capital investment.
Fundamentals Explained
Different fundamental characteristics are analyzed when handling stock versus forex. With stock, for example, when you buy a share of a company, you focus on whether the stock of the selected company will become more valuable or at least stay stable.
With forex, whether you are buying or selling, you have to consider factors affecting the countries of the currencies involved: unemployment data, GDP, consumer growth, political issues and other things influencing the value of the currency.
Commissions Summarized
Forex brokers earn money from spread (the difference between ask and bid price of the traded currency pair). In most cases, there are no extra commissions or transaction fees in forex. With tight, transparent spreads, forex trading costs are lower than any other market.
With stocks, there are commissions on trades you choose to make.
Volatility and liquidity
A popular topic for the forex vs stocks debate refers to market volatility. This measures price fluctuations within the markets that can either help traders to gain profits if the trade is executed effectively, or losses if the trade is not successful. Forex traders in particular often look for high liquidity within the market, as this means that an asset can be bought and sold rapidly without having much of an effect on its price. Therefore, it is likely that high market volatility is more beneficial for short-term traders. Many forex strategies work to open and close positions in a short period of time, with the intention of making a profit from small price movements when the market is particularly volatile. This way, they can enter and exit trades with quick precision.
Style Differences
Unlike in stocks, forex market can be traded literally as your heart desires. You can go long or short and no one will say a word! The opportunities in currency market are everywhere – no matter how you choose to trade and which way the market is moving.
Your job is to buy or sell at the right time. There is no structure bias to the market, since there is always an equal access to trade, whether the market is falling or rising.
With stocks, when the company is going down, your shares and investment is going down with it. There is no turning back! There are restrictions on short selling and stop orders.
In other words, while a company can fail, major currencies will continue to strive!
Middleman
In stock market, you need to use a broker or trade online, depending on the stock you choose to deal with. Forex trading allows you to trade online and all orders are executed electronically.
Initial Investment
With stocks, you need to have at least $2,000 available. That’s quite an amount and not everyone is able to put down sums like that without thinking twice.
Forex allows you to start trading with as little as $100 or even less! There is an option of micro and mini accounts with minimum deposit of just $1.
There is also demo account available with every forex broker, where you can practice your trading skills until ready to go into the real trading.
Correlation between the forex and stock markets
It is common practise for traders to look for correlation between financial markets, in order to predict future price movements. In particular, the forex and stock markets have been known to correlate for various stock market indices and subsequent exchange rates.
