Forex Vs Stocks: What Is Different About The Forex Market?

Many stock traders are now looking at forex vs stocks, wondering if it might be worth making a move or at least increasing their range so that they begin to trade both. Even successful stock traders should consider diversifying and stock traders who are struggling may benefit greatly from making the switch. Here we compare forex vs stocks and consider some of the advantages of forex trading.

Global Market

Currency trading is a global affair. You are not limited to dealing in the currency of your own country. Forex is an over-the-counter market and there is no central exchange or clearing house. This gives the forex market several advantages over the stock market for a retail trader.

Transparent Market

The value of a stock is affected by the performance of a company whose figures could be manipulated or known to insiders for some time before it is revealed publicly. Currency prices, on the other hand, are driven by the economic performance of a whole nation. This is almost impossible to manipulate and much more transparent. This means that a trader working from home, out of the loop of private financial information, is on a much more level playing field in the forex market than in stocks.

Liquidity

Daily transactions in the currency exchange market total almost $4 trillion per day. This is more than the total of all of the world's stock exchanges added together. What is more, there are only a limited number of possible currency pairs compared with probably hundreds of thousands of company stocks. With so much money concentrated in such a limited arena, price manipulation by the bigger players is much less of a problem, if it exists at all.

As you can imagine, such high liquidity also means that it is extremely unlikely that a trade in any of the major currency pairs would have difficulty getting matched, even in bad times. This is a huge advantage, especially if you are trading large positions.

Development

So if forex trading has so many advantages, why is it that it is not been popular until recently? The answer is that the market itself only began for real in the 1970s when exchange rates stopped being permanently pegged by the 'gold standard' and were allowed to fluctuate.

Even then, it was only the banks, hedge funds etc who were involved in trading on the currency market at first. There was no history of personal investors getting on the phone to a broker to trade in currency as there was in stocks. This means that it was not until the development of the internet that the forex market opened up and forex vs stocks became a real choice for retail traders.

Two Way Market

When you are trading stocks, you are limited to buying a stock that you think will rise and then selling it. Forex, however, is always an exchange: in order to buy one currency you must simultaneously sell another. You cannot buy US dollars with US dollars. So you are always dealing in a currency pair, and this means that you can open a trade in either direction. As with stocks you can buy the pair (in fact, buy the base currency) if you think that the value of the base currency relative to the quote currency will rise, but you can also do it the other way around. That is, you can begin by selling the pair (selling the base currency to buy the quote currency) if you think that its value will fall.

Trading Hours

Trading opens on Monday morning in Australia (Sunday evening US time) and does not close until Friday afternoon in the USA. So forex is a 24 hour market, five days a week. This can be advantageous for anybody who needs to trade outside of normal business hours in their own country. While speculative stock trading is difficult if you cannot access the internet during the day, you can always trade in currency in the evening.

Smaller Account Balance And Higher Leverage

Forex brokers will routinely allow leverage of 200:1 or even more, so you can control a much larger position with a smaller account balance. This also gives forex brokers an opportunity to allow traders to begin with a lower investment. While a regular forex account usually carries a minimum investment of $10,000 or more like a stock broker account, it is possible to open a mini forex account with just a few hundred dollars. So traders can get started for a very low investment.

The forex market is getting so much airtime that it is worth investigating for all retail stock traders. Open up a demo forex trading account so that you can test out your systems on the forex market without risk and look into forex vs stocks for yourself.