Traders usually compare stocks from forex to identify which type of market is better to trade. In spite of being interrelated, both markets are immensely different. The foreign exchange market has distinct characteristics that distinguish it from other markets and in the view of many, in addition that it makes it more attractive to traders.
When choosing between trading stocks or foreign exchange, it usually comes down to understating which style of trading best suits you. Yet comprehending the similarities and differences between the stocks and foreign exchange markets lets the traders make well-versed decisions in trading based on aspects like liquidity, volume and market conditions.
The list below shows a more comprehensive view on how closely the foreign exchange market is compared to the stock market.
One of the largest variances between the foreign exchange and the stocks market is the complete size of the market. Forex is likely to trade approximately $5 trillion daily, with the majority of the trading is focused on some major pairs including the USD/JPY, EUR/USD, AUD/USD and GBP/USD. The volume of the forex market dwarfs the volume of the dollar of the world’s entire stock markets combined, with the rough average of $200 billion daily.
Having that size of trading volume can bring a lot of traders many advantages. High volume signifies traders can normally get their orders implemented easier and closer to their desired prices. While all markets are susceptible to gaps, acquiring more volatility at each point of pricing better quips the traders to exit and enter markets.
Generally, a market which trades in high volume has high liquidity. Liquidity results in lower transaction charges and tighter spreads. Typically, major forex pairs have immensely low spread and costs of transactions compared to stocks, and it is one of the major benefits of trading in the forex market.
Foreign exchange is not a traditional exchange market but rather an over the counter market. Trading is enabled through the interbank market. This signifies that trading in forex can go globally even during different business hours and sessions. Thus, the trader has the capability to virtually trade.
Minimal or Narrow commission
Most brokers do not charge commision, instead they make their margin in the spread. Forex exchange spreads are fairly transparent compared to the tracings costs of other contracts.
Narrow Focus vs. Wide Focus
There are 8 major currencies that traders can focus on in the forex market, while there are thousands in the stock universe. Traders will look for deviating and congregating trends between currencies to match an FX pair to trade, with just eight economies to concentrate on and since the foreign exchange comes in pairs. Eight currencies are easier to concentrate on compared to a thousand stocks.
To summarize, forex has a large volume of around $5 trillion per day while stocks have less volume of approximately $200 billion per day. Forex has high liquidity while stocks are less liquid. The forex market is available 24 hours a day, while stocks are open 8 hours. The FX has minimal to no commissions and the stocks has commissions. Lastly, forex has narrow focus and stocks have wide focus.
Whether you pick to trade foreign exchange or stocks relies greatly on your objectives and the trading style that you prefer.