This is a guest post by Phillip Konchar, he is the Head Tutor at My Trading Skills.
The Forex market has some notable differences compared to the stock market, some of which may give an advantage to the Forex trader over his stock-trading peer. Nevertheless, we’ll try to explain the main differences between these two markets as objectively as possible, so you can judge for yourself which market suits you better.
1 – Open Market Hours
One of the main differences between Forex and stock trading, and the first one that we’ll cover in our list, are the open market hours. The Forex market is open around the clock, Monday through Friday.
Whenever you find a trade setup and want to place a trade on the market, you’ll likely be able to do that. The Forex market is an over-the-counter market, where currencies are traded during Forex trading sessions, including the New York, London, Tokyo and Sydney session. These trading sessions span over different time zones, making Forex trading possible 24 hours a day.
The stock market is usually linked to the open market hours of a stock exchange, such as the New York Stock Exchange, which is open from Monday through Friday 9:30 a.m. to 4:00 p.m. Eastern time. However, if a share trades over-the-counter, you may be able to trade it outside of regular market hours.
2 – Commissions and Trading Fees
Another notable difference between the Forex and stock market is the structure of fees and commissions. A stock brokerage firm usually charges you either a percentage of your total trade size or a flat fee as a commission. These commissions have significantly fallen over the last few years on growing competition among discount brokers.
Forex brokers, on the other hand, usually charge only the spread as a commission, which is the difference in the buying and selling prices of a currency pair. Depending on the liquidity of the pair, spreads can be as low as one pip on the most-traded pairs but rise significantly on less-traded and exotic pairs.
3 – Number of Tradable Instruments
While there are thousands of stocks to trade on and new IPOs regularly add new stocks to the market, the Forex market trades only a limited number of currencies. There are eight major currencies on the market, also called the majors, which include the US dollar, the euro, the British pound, the Swiss franc, the Canadian dollar, the Japanese yen, the Australian dollar and the New Zealand dollar. Besides the major currencies, there are dozens more which are not actively traded, less liquid and more volatile.
Even if we take all currencies in the world, there are only 180 currencies that are used in 195 countries, as recognised by the United Nations. Compare this with around 2,800 stocks traded on the NYSE alone, and you’ll see the difference.
4 – Insider Trading Practices
The Forex market is the largest financial market in the world with an average daily turnover of around $5.3 trillion, according to the Bank for International Settlements. This makes insider trading almost impossible. Even large banks with their multi-billion orders aren’t able to move exchange rates to a notable extent.
The stock market, on the other hand, is much smaller in terms of trading volume and insider trading has been a common (although illegal) practice in the market. For comparison, the NYSE has an average daily turnover of around $150-200 billion. While this is not the only stock exchange in the world, it’s by far the largest one by market capitalisation.
5 – The Amount of Leverage Offered
The Forex market is famous for its high leverage, and many new traders are attracted to Forex trading mainly because of that. It’s not unusual that some non-US-based Forex brokers offer leverage ratios of 100:1, 200:1 or even 400:1, which allows traders to trade a much larger position size than their trading accounts would normally allow.
On the stock market, leverage is heavily restricted. Some stock brokers offer leveraged Portfolio Margin accounts, but the initial deposit requirement is usually much higher than for individual accounts. Even CFDs on stocks are capped by a 25:1 leverage by most brokers.
Whether you trade on Forex or stocks, be cautious when using too much leverage as it can magnify both your profits and losses.
6 – Market Liquidity
Our final difference in the list is market liquidity. The Forex market is arguably the most liquid in the world, especially when trading the eight major currencies. Banks, hedge funds, multinational corporations, governments, central banks, investors and individual traders all exchange currencies on a regular basis, creating buyers and sellers at almost every price-level. Higher liquidity also leads to lower transaction costs for traders.
Liquidity on the stock market largely depends on the stocks that you’re trading. Blue chips and other attractive stocks are more liquid than stocks from smaller companies. In the end, the lower liquidity of the stock market may cause market orders not to be filled instantly or at the desired price.
These are the six main differences between the Forex and the stock market. Both markets have certain advantages and disadvantages, and it’s completely up to you which market you choose. Do you want to be able to trade around the clock on high leverage? Then the Forex market might be better for you. Or, do you prefer to have thousands of tradable instruments at your disposal instead of dozens of currencies? Then choose the stock market. In the end, trading is all about discipline and experience which you have to gain on whatever market you trade.
Bio: Phillip Konchar is the Head Tutor at My Trading Skills, an online provider of on-demand financial education for margin forex and spread bet traders. Over the past 10 years he has provided trading education and market analysis to a range of financial institutions including Core Spreads, IG Markets, CMC Markets, Alpari, ETX Capital, FxPro, X-Trade Brokers XTB, GKFX Financial Services, Abu Dhabi Securities ADSL, Admiral Markets and Market Spreads. He specialises in the application of technical analysis in margin trading.