I have traded a bit in both stock and forex markets. The two markets are suitable for traders with different personalities and habits.
Most people who are trying to invest or trade, often compare the forex and stock markets to determine which market is more suitable for their trading habits and lifestyle. The forex market has some characteristics that makes it different from the stock markets, and for many trades, more suitable to trade.
Before choosing to trade in the forex or stock markets, decide which trading style suits you better. Knowing the similarities and differences between the stocks and forex market will also enables you to make informed trading decisions.
4 DIFFERENCES BETWEEN FOREX AND STOCK MARKETS
The table below summarizes a few key differences between the forex market and the stock market:
|FOREX MARKET||STOCK MARKET|
|Higher volume (~$5T daily)||Lesser volume (~$0.2T daily)|
|More liquid||Less liquid|
|24 hours x 5 days||8 hours x 5 days|
|Low cost||Higher cost|
Let’s take a more in-depth look into how exactly the forex market compares with equities (stocks).
The biggest difference between forex and stocks is the size of the markets. Forex trades around US$5 trillion a day, with over 80% on a few major pairs like the EURUSD, USDJPY, GBPUSD, AUDUSD, USDCHF, NZDUSD and USDCAD. Comparatively, the global stock markets trades around US$200 billion daily.
Having a large trading volume has many advantages for traders. Traders can executed their orders more easily and closer to the prices they want.
With high volume comes high liquidity. Liquidity leads to tighter spreads and lower transaction costs. Forex major pairs typically have low spreads and transactions costs when compared to stocks and this is one of the key advantages of trading the forex market versus the stock market.
3. Market Duration
Forex is an OTC (over-the-counter) market meaning that it is not transacted over a traditional exchange. Trading is facilitated through the interbank market, meaning that trading can go on all around the world during different countries business hours and trading sessions. Therefore, the forex trader has access to trading 24 hours a day, 5 days a week. In Singapore (+8 GMT), this is from 5am on Monday morning, to 5am on Saturday morning. Stocks, on the other hand, trade at different times, depending on the opening hours of the local exchange. This is typically 8 hours x 5 days. So the forex market is available for trading 3 times as long.
4. Minimal or no commission
Most forex brokers do not charge commission. Instead, they make their margin on the spread – which is the difference between the buy and sell price. When trading stocks or indices, traders often must pay both the spread and commission to the broker.
TRADE FOREX OR STOCKS?
Whether you choose to trade forex or stocks depends greatly on your trading habits. Below are some different types of trading styles and how it affects trading in forex and stocks.
Short-Term (or Scalping)
A trading style where the trader looks to open and close trades within minutes, taking advantage of small price movements.
- Pro: Traders can focus more on volatility and less on fundamental variables that move the market prices.
- Con: As a result of placing more trades, traders who does not have a good strategy may lose more money.
- Forex or Stock: Suited to forex trading due to inexpensive costs of execution.
A trading style where the trader looks to hold positions up to a few days, where the trades are often executed based on technical strategies.
- Pro: Lower capital requirements compared with other styles because a trader is looking for larger moves.
- Con: Trades comes from technical analyses which may take time.
- Forex or Stock: Suited to trading forex and stocks.
A trading style where a trader looks to hold positions for months or years, often basing decisions on long-term fundamentals.
- Pro: Traders do not have to spend as much time analysing.
- Con: Unable to capitalise on volatile movements.
- Forex or Stock: Suited more to stock trading because the forex market tends to vary in direction more than stocks.
If you are cost-conscience, and prefer to analyse technical than fundamentals, trade forex. If you are better at analysing fundamentals, and do not want to bother yourself at timing trades, stocks can be a more suitable option.
If you feel that I have missed out anything, do reach out to me below. 🙂