Compare Forex Trading and Stock Trading
The forex (foreign currency exchange) market is the largest and most liquid financial market in the world. The forex market unlike stock markets is an over-the-counter market with no central exchange and clearing house where orders are matched.
Traditionally forex trading has not been popular with retail traders/investors (traders takes shorter term positions than investors) because forex market was only opened to Hedge Funds and was not accessible to retail traders like us. Only in recent years that forex trading is opened to retail traders. Comparatively stock trading has been around for much longer for retail investors. Recent advancement in computer and trading technologies has enabled low commission and easy access to retail traders to trade stock or foreign currency exchange from almost anywhere in the world with internet access. Easy access and low commission has tremendously increased the odds of winning for retail traders, both in stocks and forex. Which of the two is a better option for a trader? The comparisons of retail stock trading and retail forex trading are as follows;
- Nature of the Instrument
The nature of the items being bought and sold between forex trading and stocks trading are different. In stocks trading, a trader is buying or selling a share in a specific company in a country. There are many different stock markets in the world. Many factors determine the rise or fall of a stock price. Refer to my article in under stock section to find more information about the factors that affect stock prices. Forex trading involves buying or selling of currency pairs. In a transaction, a trader buys a currency from one country, and sells the currency from another country. Therefore the term "exchange". The trader is hoping that the value of the currency that he buys will rise with respect to the value of the currency that he sells. In essence, a forex trader is betting on the economic prospect (or at least her monetary policy) of one country against another country.
- Market Size & Liquidity
Forex market is the largest market in the world. With daily transactions of over US$4 trillion, it dwarfs the stock markets. While there are thousands of different stocks in the stock markets, there are only a few currency pairs in the forex market. Therefore, forex trading is less prone to price manipulation by big players than stock trading. Huge market volume also means that the currency pairs enjoy greater liquidity than stocks. A forex trader can enter and exit the market easily. Stocks comparatively is less liquid, a trader may find problem exiting the market especially during major bad news. This is worse especially for small-cap stocks. Also due to its huge liquidity of forex market, forex traders can enjoy better price spread as compared to stock traders.
- Trading Hours & Its Disadvantage to Retail Stock Traders
Forex market opens 24-hour while US stock market opens daily from 930am EST to 4pm EST. This means that Forex traders can choose to trade any hours while stock traders are limited to 930am EST to 4pm EST. One significant disadvantage of retail stock traders is that the stock markets are only opened to market makers during pre-market hours (8:30am - 9:20am EST) and post-market hours (4:30pm - 6:30pm EST). And it is during these pre-market and post-markets hours that most companies release the earnings results that would have great impact on the stock prices. This means that the retails traders (many of us) could only watch the price rise or drop during these hours. Besides, stop order would not be honored during this times. The forex traders do not suffer this significant disadvantage. Also, a stock trader may supplement his/her trading with forex trading outside the stock trading hours.
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