Availability

There is a major difference in availability between forex market and stock market. Forex market remains open for 24 hours a day, 5 days a week. There is no pause in transactions during the open days. So you can trade any time you want. But this is not the case for stock market. In the open days, there are specific times for the stock exchange to open and close. So you can’t just trade shares any time you want.

Liquidity

The forex market is a highly liquid market due to the huge number of traders and the volume of money being traded. Whenever you want to trade currency pairs, either in the day time or during the night, there are always plenty of buyers and sellers to trade with. You can liquidate your position at close to the quoted market price at any time.

But in case of stock market, it sometimes is not that easy to liquidate your shares. You may find it difficult to get a buyer for some shares to the limited number of participants.

Leverage

Forex is inherently leveraged. The speculator puts down about 1% of the value of the trade. This multiplies both risks and rewards, and is a major attraction of forex trading.

Stock trading is inherently unleveraged. It may be possible to borrow up to 50% of the value of some blue chip stocks, but it is not as simple as with forex.

Ability to go long or short

When trading forex, it is as easy to go short as it is to go long. The only rule is that you need to sell a currency pair for more than you buy it for.

In stock trading, you can sometimes go short, but there are often restrictions, such as the uptick rule. When the market is turbulent, regulatory authorities may completely ban short selling altogether.

Time frames

Holding periods in stock trading may extend to decades. Some investors are long term holders of stocks. Although day traders hold stocks for short periods, they are only a portion of the market.

In contrast, forex is a true traders market. Some traders will hold a position for less than 30 seconds, while a six week time horizon is considered long term.

Insider trading

Whilst it is illegal to manipulate stock prices, or take advantage of insider information, it is almost certain that this occurs, despite the best efforts of regulators. This happens because the lower liquidity of stocks, and their dependence on information about the profitability and prospects of the company means that inside information can be valuable.

The forex market is so massive and liquid, and the information that affects it is so well distributed that insider trading as such is impossible. Manipulation does occur, but this is by brokers who move prices around within their own trading systems, rather than within the market as a whole.

Conclusion

Forex offers significant advantages to traders in terms of availability, flexibility, liquidity and leverage. It is a market that is designed for trading rather than investing, and holding periods are typically short.

The stock market from all these point of views is far more restrictive. With its higher costs, lower liquidity, country based trading system, limited number of traders and time based transactions, a stock exchange offers fewer options for its traders.

This is why forex trading has gained popularity all over the world for small traders who consider that there are far greater opportunities in the forex market than in the stock market.

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Tags: forex, stock market

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