Traders often compare forex and stocks to determine which market is best to trade.

Despite the fact that they are interconnected, the foreign exchange market and the stock market are very different. The forex market has unique characteristics that set it apart from other markets and, according to many, make it much more attractive to trade.

When choosing to trade forex or stocks, you often need to know which trading style is best for you, but knowing the differences and similarities between stocks and forex markets also allows traders to make informed trading decisions based on factors such as market conditions, liquidity, and volume.

TOP-5 DIFFERENCES BETWEEN FOREX AND SHARES

The table below summarizes a few key differences between the Forex market and the stock market:

FOREX MARKETSTOCK MARKET
Large volume- Around $5 Trillion per dayLess volume – Roughly $200 billion per day
Highly LiquidLess liquid
24 Hour Markets8 Hour Markets
Minimal or no commissionsCommissions
Narrow FocusWide Focus

Let’s take a closer look at exactly how the forex market relates to stocks.

1) Volume

One of the biggest differences between the stock market and forex is the sheer size of the forex market. Forex trading is estimated to be around $ 5 trillion per day, with most of the trading focused on a few major pairs such as EUR / USD, USD / JPY, GBP / USD, and AUD / USD. The volume of the foreign exchange market is much larger than the dollar volume of all the world’s stock markets combined, which averages about $ 200 billion a day.

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Such a large trading volume can provide traders with many benefits. Large volume means that traders can usually more easily fill their orders and get them closer to their desired prices. Although all markets are prone to gaps, having more liquidity at each pricing point gives traders more opportunities to enter and exit the market.

2) Liquidity

A market that trades in large volumes usually has high liquidity. Liquidity leads to tighter spreads and lower transaction costs. Major Forex pairs generally have extremely low spreads and transaction costs compared to stocks, and this is one of the main advantages of trading the foreign exchange market over trading the stock market.

3) 24 hour markets

Forex is an over-the-counter market, which means that it does not trade on a traditional exchange. Trading is carried out through the interbank market. This means that trading can take place all over the world during business hours and trading sessions of different countries. Thus, a Forex trader has access to trading almost 24 hours a day, 5 days a week. On the other hand, major stock indices trade at different times and depend on different variables.

4) Minimum commission or lack thereof

Most forex brokers do not charge a commission, instead they make margin on the spread, which is the difference between the buy price and the sell price. When trading stocks (stocks), a futures contract, or a major index like the S&P 500, traders often have to pay the broker a spread along with a commission.

5) Narrow focus versus wide focus

There are eight major currencies that traders can focus on while there are thousands of stocks in the world. With only eight economies to focus on, and since forex trades in pairs, traders will look for diverging and converging trends between currencies to match the currency pair to trade. Eight currencies are easier to follow than thousands of stocks.

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Variables affecting major currencies can be easily tracked using the economic calendar.

SHOULD I TRAD ON FOREX OR STOCKS?

Whether you choose to trade forex or stocks depends a lot on your goals and preferred trading style.

The table below shows the different types of trading styles, including the pros and cons of each when trading Forex and stocks.

TYPE OF TRADERDEFINITIONADVANTAGESDISADVANTAGESFOREX 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-TermA 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-TermA 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 analysing.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.

FAQ

How can I go from Forex trading to stock trading?

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To move from forex to stock trading, you need to understand the fundamental differences between forex and stocks. When you keep this to a minimum, forex movements are caused by interest rates and their expected movements. Stocks depend, among other things, on earnings, balance sheet projections, and the economy in which they operate.

Are there any differences between forex trading and commodities?

Forex and commodities differ in terms of regulation, leverage, and exchange limits. Forex markets are much less regulated than commodity markets, while commodity markets are highly regulated.

Just like stocks, commodities are traded on exchanges. Commodity exchanges set a roof and a floor for fluctuating commodity prices, and once these limits are reached, trading can be stopped for a certain amount of time depending on the product being traded. Forex and the stock market have no restrictions that can interfere with trading.

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