I am often asked about whether the stock market is similar to the Forex market and how both markets compare.
There are some huge differences between the Forex and stock markets that make them suitable to different sorts of traders and investors.
A lot of traders are attracted to the Forex market because it offers very minimal trading costs, you can start with a small amount of capital and there are large moves happening frequently. The markets are also open 24 hours a day offering a lot of trading opportunities.
The stock market also has its benefits, but is a completely different kettle of fish.
Today we look at what market you should trade, or if you should trade both.
What are the Major Differences Between Stocks and Forex?
I have included a table below that discusses the major difference between the stock and Forex markets.
1: Market Size
Something that should interest you if considering what markets to trade is the size.
The Forex market trades on average $5.1 trillion dollars per day and is the largest market in the world. With this size it means prices are free flowing, there are a lot of trading opportunities and you will not have problems entering trades.
The stock market is far smaller with an average of around $200 billion dollars per day.
Whilst that might sound a lot of money, there are thousands of stocks to trade from and many of these stocks have wide gaps.
The Forex market is doing the bulk of its transactions through the major currencies such as the USD, GBP and AUD. This also means you will have less gaps and better execution prices.
2: Volume and Liquidity
Forex markets normally have tight spreads and low transaction costs.
The main reason for this is because of the high volumes of currencies being traded and the higher liquidity.
The stock markets have far less volume and liquidity that leads to higher transaction costs.
3: Market Opening Times
The currency market never stops. There are currencies being exchanged 24/7.
As an individual trader you will be able to make trades through a broker 5 days a week and 24 hours per day.
This leads to far less gaps and a smoother technical analysis picture.
Stock markets trade in 8 hour sessions. These sessions are dependent on the stocks country and their market trading times.
Because of the large amount of time in between each session, price can often open a new session far higher or lower than what it previously closed creating a large amount of risk for you as the trader.
4: Trading Costs
Most Forex brokers give you the choice of two pricing models.
With the first you can pay no commissions and pay the spread markup applied by the broker.
The second model is where you will pay a commission, but be offered far smaller spreads.
The spreads in the Forex markets are very transparent and you can see them before entering a trade and work out your trades cost.
When trading stocks you will normally pay commissions for both entering and exiting a trade, as well as paying the spread.
5: Amount of Markets / Pairs to Trade
As the Forex market has grown more and more popular, brokers have begun to offer more and more currency pairs to trade.
In saying that; there are only eight major currency pairs that trade by far and away the bulk of the Forex volume.
In the stock market there are 2,800 stocks listed on just the New York Stock exchange alone.
Trying to track literally thousands of different stocks, there fundamentals and technical picture, is a far greater task than watching 8 major Forex pairs.
Forex Markets Compared to Other Markets
Stocks are not the only markets you may have considered trading.
I am often asked about other markets because traders want to find more trading opportunities.
When trading through a CFD broker a lot of these markets operate in very similar ways to the Forex market with extended trading hours, smaller trading costs and bigger leverage available.
These markets include the major stock indices (not individual stocks), Oil, Gold and Silver.
Forex vs Stocks: Should You Trade Stocks, Forex or Both?
If you should trade stocks, Forex or both comes down to a few key factors.
Do you want to make more trades, have a lower capital outlay and few trading costs?
Or, do you want to invest in individual stocks, are happy to ride out the market waves and are not looking for short sharp trades?
If you like to make more trades and are suited to a large market that has plenty of volatility, then the Forex market is probably for you.
As an individual stock investor you will have to find, track and monitor thousands of different stocks. You will have to have a far larger capital investment to start with and be prepared for higher trading costs.
Whilst in the Forex markets there are dozens of different pairs, the bulk of the trading is done in only a few pairs making it far easier to find trading opportunities and perfect your trading system.