Traders often compare forex vs stocks to determine which market is better to trade. Despite being interconnected, the forex and stock market are vastly different. The forex market has unique characteristics that set it apart from other markets, and in the eyes of many, also make it far more attractive to trade.
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 BETWEEN FOREX AND STOCKS
The table below summarizes a few key differences between the forex market and the stock market:
| FOREX MARKET | STOCK MARKET |
|---|---|
| Large volume- Around $5 Trillion per day | Less volume – Roughly $200 billion per day |
| Highly Liquid | Less liquid |
| 24 Hour Markets | 6:30 Hour Markets |
| Minimal or no commissions | Commissions |
| Narrow Focus | Wide Focus |
Let’s take a more in-depth look into how exactly the forex market compares with equities (stocks).
1) Volume
One of the biggest differences between forex and stocks is the sheer size of the forex market. Forex is estimated to trade around $5 trillion a day, with most trading concentrated on a few major pairs like the EUR/USD, USD/JPY, GBP/USD, and AUD/USD. The forex market volume dwarfs the dollar volume of all the world’s stock markets combined, which average roughly $200 billion per day.
2) Liquidity
A market that trades in high volume generally has high liquidity. Liquidity leads to tighter spreads and lower transaction costs. Forex major pairs typically have extremely low spreads and transaction costs when compared to stocks and this is one of the major advantages of trading the forex market versus trading the stock market.
3) 24 Hour Markets
Forex is an over-the-counter market meaning that it is not transacted over a traditional exchange. Trading is facilitated through the interbank market. This means 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 virtually 24 hours a day, 5 days a week. Major stock indices, on the other hand, trade at different times and are affected by different variables.
4) Minimal or no 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 selling 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.
Forex spreads are quite transparent compared to the costs of trading other contracts. Below you will see the spread of the EUR/USD highlighted inside the executable dealing rates. The spread can be used to calculate the cost for your position size upfront prior to execution.
5) Narrow focus vs wide focus
There are eight major currencies traders can focus on, while in the stock universe there are thousands. With only eight economies to focus on and since forex is traded in pairs, traders will look for diverging and converging trends between the currencies to match up a forex pair to trade. Eight currencies are easier to keep an eye on than thousands of stocks.
SHOULD YOU TRADE FOREX OR STOCKS?
Whether you choose to trade forex or stocks depends greatly on your goals and preferred trading style.
The table below shows different types of trading styles, including the pros and cons of each when trading forex and stocks.
| TYPE OF TRADER | DEFINITION | ADVANTAGES | DISADVANTAGES | FOREX VS STOCKS |
|---|---|---|---|---|
| Short-Term (Scalping) | A trading style where the trader looks to open and close trades within minutes, taking advantage of small price movements. | Traders can focus more on volatility and less on fundamental variables that move the market. | As a result of placing more trades, beginner traders may lose more money if their strategy isn’t fine-tuned. | Suited to forex trading due to inexpensive costs of executing positions. Some exchanges require large capital account balances to trade. Most forex brokers only require you to have enough capital to sustain the margin requirements. |
| Medium-Term | A trading style where the trader looks to hold positions for one or more days, where the trades are often initiated due to technical reasons. | Lower capital requirements compared with other styles because a trader is looking for larger moves. | Trades must be accompanied by analysis which may take time. | Suited to trading forex and stocks. |
| Long-Term | A trading style where a trader looks to hold positions for months or years, often basing decisions on long-term fundamental factors. | Traders do not have to spend as much time analyzing. | Large capital requirements are required to cover volatile movements. | Suited more to stock trading because the forex market tends to vary in a direction more than stocks. |