Differences between the Foreign Exchange Market and Stock Market
Have you ever wondered “What’s the difference between Forex and the Stock Market?” Well, even though these two markets share a lot of features in common, there are considerable differences between the two as well.
Some of them have been outlined below:
Leverage: The biggest difference lies in the leverage levels offered by the brokers in the respective markets. In the case of the stock market, the trader is able to get a leverage of about 2:1 in the United States but in other countries, it can go up to around 15:1.
There is also a difficult process involved in qualifying for any sort of leverage, due to which the majority of the traders in the stock market have a limited number of financial options from their brokers.
The forex market, however, is well known for the high leverage levels offered by brokers. In the United States, it is currently 50:1 while in other countries it can be as high as 200:1.
Gradually, brokers are increasing the levels of the leverage and nowadays you would often find them offering leverages as high as 300:1, 400:1, 500:1 or even higher.
Liquidity: Another difference lies in liquidity. Trading in the stock market can be quite problematic at times as you can only buy or sell a limited number of shares within a specific stock exchange.
In the Foreign Exchange market, on the other hand, things are completely different.
The number of currencies for trading is very high and the amount of currency that you can purchase or sell is unlimited.
In order to further illustrate the difference between the two financial markets, the report of the Bank of International Settlements (BIS) has stated that the stock market gets an average of $2 trillion daily whereas Forex gets an average of $4.9 trillion per day.
Trading Hours: In the stock market, you are bound by normal business hours. You can only carry out transactions when the trading is open at the centralized exchange market from where you are working.
Say, if you are trading in the New York Stock Exchange, you will only be able to trade on Mondays to Fridays between 0800hrs EST and 1700hrs EST.
But that is not the case with the Forex market. There is no central exchange place and you can carry out trades whenever you want as it is open twenty-four hours a day and six days a week.
So even if you have other stuff to do or other responsibilities, you can adapt your trading schedule according to whenever you are free instead of adjusting your life and your job to fit the timings of the trades.
For instance, you can work on your job during the day and work on the trades during the evening once you have come back home.
Bear Markets: The stock market can go into decline whenever the maximum number of stocks loses their value. Stock traders may still try to make profits by shorting out at such a period but this is always strictly regulated and is extremely risky.
The benefits resulting from such a move are almost nonexistent unless you are making a very large investment.
But in the forex market, you do not face such high risks as there is never a bear market. When one currency is in decline, there is no need to worry as it might not be the same for others.
Even if both currencies in a pair are in decline, you could always gain profits by selling the declining currency and purchasing the ones with the slower decline and then reversing the transaction when the fast declining currency attains its low point. You could also draw profits from selling high and buying back low.
Regulations: The stock exchange in any country has very strict regulations that must be followed by both brokers and traders. This limits the number of brokers, traders and other market players, making it a bit difficult for them to work in the market.
The Forex market, on the other hand, has no such restrictions and there are no limits as to the amount you can invest in, exactly when you can trade, which currency you should trade in etc.
Although both stock markets and the Foreign Exchange market are thriving in the world, the latter seems to hold the upper hand since it offers more freedom and options to traders, so it is all up to you!