Forex vs Stocks: The Top Differences and How to Trade Them

Forex traders often compare stocks and forex to decide which market to trade. Although they are interconnected, forex and the stock market are vastly distinct. Forex market is unique and attractive because of its unique characteristics.

Forex vs Stocks: The Top Differences and How to Trade Them

When choosing to trade forex or stocks, it often comes down to knowing which trading style suits you best.But knowing the differences and similarities between the stock and forex market also enables traders to make informed trading decisions based on factors such as market conditions, liquidity and volume.

TOP 5 DIFFERENCES BEHIND FOREX & STOCKS

Below is a table that summarizes some key differences between forex and stock markets.

Let's look at how the forex market compares to stocks (equities).

1) Volume

One of the biggest differences between forex and stocks is the sheer size of the forex market. Forex trades at $5 trillion per day. Most forex trading is concentrated on just a few pairs, such as the USD/JPY and EUR/USD. Forex market volume is larger than all of the stock markets in the world, which average around $200 billion per day.

A large trading volume is a benefit for traders. High volumes mean traders are able to execute their orders more quickly and get the prices they desire. All markets have gaps. However, traders can be more successful entering and exiting the market if they have greater liquidity at each price point.

2) Liquidity

High liquidity is a market that trades in large volumes. Liquidity leads to tighter spreads and lower transaction costs. Forex major pairs typically have extremely low spreads and transactions costs when compared to stocks and this is one of the major advantages of trading the forex market versus trading the stock market. Read more on the differences in liquidity between the forex and stock market.

3) 24 hour markets

Forex is an online market, which means that transactions are not done on a traditional exchange. The interbank market facilitates trading. Trading can be done anywhere in the world, regardless of where you are located and during what time it is being traded. Therefore, the forex trader has access to trading virtually 24 hours a day, 5 days a week. Major stock indices, on the other side, trade at different times and can be affected by different variables. Visit the Major Indices page to find out more about trading these markets-including information on trading hours.

4) No or minimal commission

Most forex brokers charge no commission, instead they make their margin on the spread - which is the difference between the buy price and the sell price. When trading equities (stocks) or a futures contract, or a major index like the S&P 500, often traders must pay the spread along with a commission to a broker.

Spreads for Forex are transparent when compared to other trading contracts. Below you will see the spread of the EUR/USD highlighted inside of the executable dealing rates. Spreads can be used to determine the cost of your position size before execution.

5) Narrow focus or wide focus

There are only eight major currencies that traders can concentrate on while there are many in the stock universe. Forex pairs are traded in pairs so traders can focus their attention on only eight countries. It is easier to focus on eight currencies than thousands of stocks.

The variables that effect the major currencies can be easily monitored using an economic calendar.

SHOULD YOU TRADE FOREX OVER STOCKS?

Your trading goals and preferred trading style will determine whether you trade stocks or forex.

Below is a table that lists different trading styles and their pros and cons when trading stocks and forex.

FAQS FOREX VS OTHER MARKETS

How do I switch from forex trading into stock trading?

Understanding the differences between stocks and forex is essential to move from forex trading to stock trading. When you boil it down, forex movements are caused by interest rates and their anticipated movements. The revenue of stocks, their balance sheets projections, and the economies in which they are traded depend on them. Find out more on how to transition from forex to stock trading.

What are the differences between commodities and forex trading?

Commodities and Forex differ in their regulation, leverage and exchange limits. Forex markets are a lot less regulated than commodities markets whilst commodities markets are highly regulated. Leverage is a common feature in both forex and commodities markets. However, forex is more popular because of its greater liquidity and lower volatility.

Commodities can also trade on exchanges, just like stocks. The ceilings and floors that commodity exchanges create for price fluctuations in commodities are called "floors" and trading can be stopped if they reach certain limits. This depends on which product is being traded. Trading is possible in forex and stock markets without any restrictions.

Keep up to date with current currency, commodity and indices pricing on our top rates page. For insight into the most common mistakes traders make, check out our expert trading forecasts for equities and major currencies, the USD or EUR.

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