Saturday, September 12, 2009,
Ashok Niroula
The foreign exchange (Forex) market is a place where currencies of various nations are constantly bought and sold by people across the local and global markets. This is quite similar to a stock market, where investors buy and sell shares and their derivatives. Trading in both the markets is done with the single aim of making profits. Moreover, trading in both the markets is done with the help of brokers. This is where the similarities in both the trade markets end.
Forex Market versus Stock Market: Points of Difference
While the Forex market involves the trading of currencies, the stock market is a place where a company's stocks are traded. Besides this simple difference, there are multiple points of dissimilarities between the Forex market and the stock market:
Trading Time: The stock market is open for trade for limited hours in a day. In contrast, the Forex market remains open 24 hours a day, five days a week. With the Forex market remaining open through the day, investors have the flexibility to trade at any time that is convenient to them.
Liquidity: While the stock market is prone to high liquidity risks and price volatility, liquidity is never a concern in the Forex market. In fact, the Forex market is the world's most liquid market, with a daily turnover exceeding $3 trillion.
Leverage: Unlike the stock market, where there is limited leverage (this is akin to a loan offered by a broker to an investor), you can invest more money than you actually have in the Forex market. In the Forex market, leverages range from 50:1 to 200:1. This means if you have $1,000 in your margin account and your broker is offering 100:1 leverage, you have the option of trading up to $100,000 worth of currency. This offers you the opportunity to earn immense profits with limited capital.
Commissions: While in the stock market, brokers charge fees on every transaction conducted on behalf of their clients, there are no commissions or fees in the Forex markets. Brokers only charge the spread, which is the amount by which the ask price exceeds the bid price of a currency pair.
Short Selling: Unlike in the stock market, investors do not face any restriction in short selling in the Forex market.
Market Trends: Unlike the stock market, the Forex market does not see one-way traffic at any given time. If the exchange rate for one currency declines, it moves up for another currency. Thus, investors have an opportunity to profit throughout the year.
Trading Information: The Forex market is one of the fairest financial investment markets, as everyone has easy access to all information required to make vital trade decisions at any given time. This is quite unlike the stock market, where analysts and professional traders have access to inside corporate information, providing them a competitive edge. Moreover, finding a good trading opportunity in the stock market might mean scanning data related to thousands of companies. In the Forex market, traders need to focus only on six major currencies.
Volatility: The demand for currencies is unlikely to diminish even if the Forex market for that currency is weakening. So, there will always be buyers for your currency, making extreme volatility a very rare occurrence in the Forex market. This is not the case in the stock market, where the demand for a stock is dependent on market sentiments.
Lot Size: In the stock market, you can buy or sell only a limited quantity of shares at a specific price at any given time. In the Forex market, a lot of a practically unlimited size can be sold or bought at a specific market price.
These are some of the many reasons that are driving several retail investors to the Forex market from the stock market. Easy-Forex®, a leading brokerage firm in the Forex market, offers personal technical support and Live training services to make forex trading a pleasant experience.
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