Traders often compare the forex market to the stock market to see which is better to trade. Despite their interdependence, the FX market and stock market are substantially unlike. The FX market differs from other markets in several distinctive ways that, in the view of many traders, also make it far more appealing to trade.
Knowing which trading technique works best for you is often the deciding factor when trading stocks or Forex. Yet, being aware of the distinctions and parallels between the stock and forex markets also empowers traders to make wise trading judgments based on elements like market circumstances, liquidity, and volume.
THE 5 MOST IMPORTANT DIFFERENCES BETWEEN FOREX AND STOCKS
The following table lists some of the main distinctions between the foreign exchange market and the stock market:
| FOREX MARKET | STOCK MARKET |
|---|---|
| Large volume- Around $5 Trillion per day | Less volume – Roughly $200 billion per day |
| Highly Liquid | Less liquid |
| 24 Hour Markets | 8 Hour Markets |
| Minimal or no commissions | Commissions |
| Narrow Focus | Wide Focus |
Let’s examine in further detail how the FX market contrasts with stocks.
1) Volume
One of the most significant contrasts between Forex and stocks is the magnitude of the FX market. An estimated $5 trillion worth of Forex is traded daily, with most of these transactions taking place on a few key pairings, including EUR/USD, USD/JPY, GBP/USD, and AUD/USD. The dollar volume of all stock markets combined throughout the globe, which averages about $200 billion each day, is dwarfed by the magnitude of the currency market.
The benefits of having such a high trading volume for traders are many. High volume often enables traders to execute orders more quickly and closely to their desired pricing. While gaps occur in all markets, greater liquidity at each price point makes it easier for traders to join and leave the market.
2) Liquidity
A market with large-volume trading often has excellent liquidity. Tighter spreads and cheaper transactions are a result of liquidity. One of the key benefits of trading the forex market instead of the stock market is that significant FX pairs often have exceptionally low spreads and transaction fees. Learn more about how the currency and stock markets vary in terms of liquidity.
To learn more about Liquidity in Forex Market, watch this well explained Youtube Video.
3) 24/7 Markets
As it is not traded on a formal exchange, Forex is an over-the-counter market. Interbank trading is made possible by this market. This implies that trading might occur throughout various nations’ business hours and trading sessions all around the globe. As a result, the forex trader gets access to trading almost continuously five days a week.
On the other hand, major stock indexes trade at various periods and are influenced by many factors. To learn more about trading these markets, including details on trading hours, visit the Major Indices page.
4) Little to no commission
Most forex brokers don’t charge commission; instead, they rely on the spread, which is the difference between the purchase and selling prices, to cover their costs. The spread and a broker’s fee are often due by traders when trading stocks, futures contracts, or important indices like the S&P 500.
Forex spreads are relatively straightforward compared to the expenses of trading other contracts. The EUR/USD exchange rate spread, is noted within the executable trading rates in the table below. The cost of your position size may be determined upfront, before execution, using the spread.
5) Wide vs. narrow focus
Although there are hundreds of stocks, traders may concentrate on just eight main currencies. Since Forex is traded in pairs and there are only eight economies to concentrate on, traders will search for divergence and convergent patterns between the currencies to match up a forex pair to trade. It is simpler to monitor eight currencies than thousands of equities.
An economic calendar makes it simple to keep track of the factors that influence the main currencies.
WHICH SHOULD YOU TRADE: STOCKS OR FOREX?
Your objectives and chosen trading style will significantly influence your decision to trade FX or stocks.
The following table lists many trading approaches and the benefits and drawbacks of each for trading stocks and FX:
| TYPE OF TRADER | DEFINITION | ADVANTAGES | DISADVANTAGES | FOREX VS STOCKS |
|---|---|---|---|---|
| Short- Term (Scalping) | A trading style where the trader looks to open and close trades within minutes, taking advantage of small price movements. | Traders can focus more on volatility and less on fundamental variables that move the market. | As a result of placing more trades, beginner traders may lose more money if their strategy isn’t fine-tuned. | Suited to forex trading due to inexpensive costs of executing positions. Some exchanges require large capital account balances to trade. Most forex brokers only require you to have enough capital to sustain the margin requirements. |
| Medium-Term | A trading style where the trader looks to hold positions for one or more days, where the trades are often initiated due to technical reasons. | Lower capital requirements compared with other styles because a trader is looking for larger moves. | Trades must be accompanies with analysis which may take time. | Suited to trading forex and stocks. |
| Long-Term | A trading style where a trader looks to hold positions for months or years, often basing decisions on long-term fundamental factors. | Traders do not have to spend as much time analyzing. | Large capital requirements required to cover volatile movements. | Suited more to stock trading because the forex market tends to vary in direction more than stocks. |
FAQS ABOUT FOREX VS. OTHER MARKETS
How can I make the switch from FX to stock trading?
It would help to comprehend the key distinctions between Forex and stocks to go from Forex to stock trading. When it comes down to it, interest rates and the expected changes in them drive changes in the FX market. Revenue, projected balance sheets, and the economies in which they operate are just a few factors affecting stocks. Learn more about switching from FX to stock trading.
Do forex and commodities trading have any differences?
In terms of regulation, leverage, and exchange restrictions, Forex and commodities are different. Forex markets are far less controlled than commodities markets, which are heavily regulated. Both the FX market and the commodities market use leverage. However, the FX market does it more often owing to better liquidity and lower volatility (leverage can amplify losses and gains).
Likewise, commodities trade on exchanges as stocks do. Exchanges for commodities establish ceilings and floors for price variations, and depending on the traded commodity, trading may cease temporarily when these limitations are reached. There are no trading restrictions on the FX market or the stock market.