The forex market operates differently from the stock market. Knowing that the two financial markets are not the same and the features of each of them will help you to easily decide on which is most suitable for your trading and investment goals. Therefore, the key differences we have outlined below can be the starting point of your trading decisions.
Now let’s begin
1. Trading times and open market hours
One of the key variations of stock trading and forex trading is their respective trading hours. The Forex market is an over-the-counter market. The implication of this is that trading can go around the clock during Forex trading sessions. The Forex market only closes at weekends. However, because of the time zone variations, you can trade late currency late into the night if you want.
The stock market, in contrast, has fixed opening hours. So, you can only trade stock during the opening hours of stock exchanges which are normally from 8 am to 5 pm local time. This makes trading stock outside the trading hours difficult, with markets thinning before and after regular trading hours
2. Commissions and transaction costs
The increasing competition among the brokers in the forex market results in fewer transaction costs (spread). Key currency pairs commonly have very tight spreads that range from 1 to 3 pips. Compared to the forex market, the transaction cost of trading stock is significantly higher. Stockbrokers commonly charge fixed trading commissions.
3. Tradeable instruments
The forex market has only eight key currencies. So, it is easy for traders to concentrate their efforts as opposed to the stock market where they have to concentrate on hundreds of stocks.
To illustrate this, you have to study roughly two thousand stocks on the New York Stock Exchange, for example. Clearly, you can easily follow the few currency pairs in the forex market than tracking the numerous stocks listed on a single exchange.
4. The presence of intermediary in trading
Forex is an over-the-counter market, there is no centralized exchange in the Forex market and currencies are exchanged directly between buyers and sellers. Your broker is the only intermediary. If you want to buy or sell stocks on the stock exchange, you can’t bypass an intermediary if you want to make the transaction happen.
5. Massive leverage in Forex
The forex rates commonly fluctuate below one percent daily. To profit from your trades, forex brokers allow traders to open a position larger than their normal trading account size.
The leverage on the Forex market is very high than what you can get in the stock market. Forex brokers provide larger leverages which can be as high as 400:1, whereas the maximum leverage offered in the equity market is 20:1.
Forex trading is extremely risky. Equity, less so.
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