From a distance, the forex market may appear very similar to other financial markets such as the stock market. Traders often compare forex and stocks to determine which is better for them to trade in. The forex market has its own characteristics which set it apart from other markets and, for many, make it more appealing to trade in.
That’s why, in this article, the forex education experts at Learn to Trade are offering up a beginner’s guide to establishing the main differences between the forex and the stock market. With this knowledge, you’ll be able to make an informed decision on which market is best for you and follow with better observations on market conditions, liquidity and volume.
The minimum amount that is required to trade any asset is called leverage. In stock trading, you can usually trade at a maximum of 2:1 leverage. In comparison, forex trading has no qualifying requirements, ultimately making it easier to enter the forex market.
As a result of this leverage amount, not every investor is approved for a margin account in the stock market – whereas, on the forex market to qualify to trade with leverage, all the trader needs to do is open a forex trading account. In the US there is a limit of 50:1 leverage, however, in many other countries you can leverage as much as 200:1. As a result, there’s a greater freedom when entering this market, which is just one reason why it may seem more enticing to budding traders.
As forex trading is facilitated through an interbank market, trading can take place around the world during different national business hours and trading sessions. So, if you’re new to the forex trading sphere there’s plenty of time for you to be able to get stuck in, given that this market is open 24 hours a day, 5 days a week – making it incredibly accessible and therefore desirable for both novice and veteran traders alike.
Comparatively, the stock market typically operates between 7 to 8 hours a day in three individual trading sessions. There’s a pre-market opening which is also part of stock trading, where traders are able to place their orders before the actual market trading session. The New York Stock Exchange opens at 9.30PM – 16.00PM (local time) whereas the Frankfurt Stock Exchange has the longest trading session, from 9.00AM to 20.00PM (local time).
Many are attracted to the forex market due to its high liquidity. As trading is completed over the counter, there’s no delay in the execution of the trade. There’s typically a large amount of currency available to trade, so all major currencies are highly liquid in the forex market.
In comparison, when trading stocks, you’ll need to buy equities (stocks or shares) of a company – these can cost anything between a few dollars to hundreds of dollars. In the stock market, traders are required to wait for the trade to be executed by the broker until it is completed. This can typically take a few days after you’ve made the trade over the phone. Prices also vary with supply and demand – so this is important to bear in mind if you’re trading in the stock market.
Volume is the total number of shares that change hands every day. The forex market has a much greater volume than the stock market, therefore meaning that more trades can occur at a given time. A large trading volume means traders can get their orders executed more easily and closer to the prices that they want, again, making this market more appealing for new traders.
High volume usually generates more liquidity, so while all markets are prone to having gaps, having more liquidity will mean traders are better equipped to enter and exit the market. In the forex market, this means that trades can happen quicker and closer to when the decision was made. Hence, many forex experts advise using as many forex indicators as possible to inform their decisions in the market.
With our beginner’s guide, we hope that you’ll be able to understand the main differences between the forex and stock markets. Whether you’re a budding trader who’s unsure of which market to begin trading in, or you’re considering switching the market that you’re currently trading in, you’ll now be better informed to make that decision with confidence.
John James is a content writer for Learn To Trade, the foreign exchange education and learning specialists – offering a range of training courses to help people understand the currency trading market, as well as its opportunities and risks.