Forex trading vs stock trading

The foreign exchange market is different from any other financial market. The first oddity, one that we have already covered, is that it is a market where people buy nothing more than money…with money. But there are some other elements that make forex unique.

Knowing the difference between the two markets can help us spot opportunities in the way we trade.

24/7 Trading Clock

The foreign exchange market is unique in that the market never stops trading. For example, the London market opens at 2am and closes at 10:30am EST. The New York market opens at 9am to 4:30, meaning for a full 1:30, the markets overlap.

So, when the London markets close, New York has already opened. The Asian market then follow the New York close. Spot forex traders can trade each market seamlessly, with retail brokers making available the opportunity for investors to trade international markets around the clock.

Leverage

Individual investors can access leverage of up to 2:1 with stocks, but up to 50:1 with forex. Leverage is simply the amount of money you need to put up to buy an investment. At 50:1 leverage, a forex trader needs only $1 in capital to buy $50 in currency. On the other hand, stock traders use only 2:1 leverage, which means $1 in capital can purchase only $2 worth of stock.

Simple Choices

On each stock market there are literally thousands of companies to trade. If you wanted to get started trading stocks, you would have to scan through tens of thousands of companies to decide which would be a good investment—and you would have to hope that the market was open so that you could trade it.

In forex, there are only seven major currency pairs, which means that you can watch the majority of the forex market on one computer screen. Plus, unlike stocks, you don’t have to worry about CEOs, quarterly earnings, balance sheets, etc for thousands of different companies.

Instant execution of trades

Individual stocks may be thinly-traded, and some may have so few buyers and sellers that you may have to wait minutes or even hours for a trade to be filled. This isn’t the case with forex. The most liquid market in the world, forex trades are always executed instantly because there are so many buyers and sellers that they can be matched quickly and painlessly.

The amount of liquidity is due to the forex market size of $4 trillion in daily trading volume.

No Commissions

Stock brokers charge commissions to place your trades, forex brokers have zero commissions. Where you might pay $10 to place a stock trade and then pay even more to cover the difference between the current bid/ask prices, forex brokers earn their money solely on the spread.

If a quoted price is 1.4500 to sell the Euro, and 1.4502 to buy it, you’re paying only 2/100ths of a cent to buy 100 Euros. Buying stock often costs $10 per trade plus spreads ranging from 1 cent to 10 cents.

Forex sure sounds great, doesn’t it? There’s a reason why it is the world’s largest market