Compare Forex Trading and Stock Trading
Alan Perry
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 & LiquidityForex 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.
AffordabilityIn order to trade stocks, a trader needs to have quite a
significant amount of capital in his account, at least a few tens of
thousands in general. However, a forex trader can start trading with
an account of only a few hundreds dollars. This is because forex
trading allows for higher leverage. A forex trader could obtain larger
transaction compared to stock market. Some forex brokers offers 100:1,
200:1 or 400:1. A leverage of 100:1 means that a US$1k in account
could obtain a 100 times transaction value at US$100k. There is no
interest charge for the leveraged money. Stock trading generally
allows for not more than 2 times leverage in margin trading. There are
interest charges associated with margin trading.
Data Transparency & Analysis OverloadThere are thousands of
different stocks in different industries. trader needs to research
many stocks and picks the best few to trade. There are many factors
that affect the stock prices. There are much more factors that may
affects stock price than foreign currency exchange rates. The forex
traders therefore can focus on few currency pairs to trade. On top of
that, most data or news affecting currency exchange rate are announced
officially, scheduled and in a transparent manner. Retail forex
traders therefore have better chances of success than retail stock
traders.
Bear/Bull Stock Market Conditions Forex traders can trade in both way
buying or selling currency pairs without any restrictions. However,
stock traders have more constraints to trade and profit in bear market
condition. There are more restrictions and costs associated with stock
short selling. In a bull market when the economy is doing well, stock
traders have a high chance of profitability if they buy stock first
then sell it later. Savvy forex traders however, could operate in all
market conditions.
Trending Nature of Currency Major currencies are influenced by
national financial policies and macro trends This national financial
policies and macro trends tend to last long in a certain direction,
either in monetary expansionary (rate cutting) or monetary
contractionary cycle (rate hiking cycle). Stock prices however tend to
fluctuate up and down due to many factors, many of these factors are
micro and specific to the stocks. Therefore forex traders can better
exploit the trends in foreign currency markets that stock traders in
stock markets.
RegulationGenerally, most major stock markets are better regulated
than forex markets. Therefore, traders need to be aware of this
difference to stock markets. Fortunately, there are however many
reputable forex brokers in the market. With prudence and proper
research, it is not difficult to find a suitable reliable forex
brokers.
Based on the above few points, forex trading seems to be a better
trading option than stock trading, especially during these
uncertainties in the global economy. During bull market condition,
stock trading could be a viable alternative. A stock trader should
definitely seriously consider supplementing their trading with forex
trading. Forex trading enables a stock trader to exploit any
opportunity arises during non stock trading hours, by trading in forex
trading. Forex trading would also enable the stock traders to
understand a more complete big picture of world economies operations
and further enhance their stock trading skills.
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