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The Difference Between Forex and Stocks
You can get rich trading both stocks and forex.
But what’s the difference between forex and stocks?
And which one is right for you?
Many traders choose forex because you can trade with leverage and it’s cheaper. You just need to pay the spread.
Large moves can happen all day, offering countless opportunities.
Of course, similar to stocks, there are cons as well.
Difference between forex and stocks
The forex market averages $5.1 trillion worth of trades per day. It’s the largest market worldwide. With large liquidity that provides many opportunities, you won’t have problems finding a trade.
Stock markets are less liquid than forex.
The stock market trades around $200 billion daily. It seems like lots. But thousands of stocks trade in a tight range, which marks it difficult to profit. Some even trade with wide price gaps. If a stock isn’t actively traded, few people are willing to buy and sell. That causes price gaps.
For example, imagine you’re trying to trade an illiquid penny stock worth 50 cents. The price could ‘gap’ (move) 10-20 cents instantly, which makes it hard to manage risk.
Think about it this way…
With few shares to trade on a stock, a stock might ‘gap’ (move) from 20 to 10 cents. If that happens, you’d lose 50% in a flash!
Low liquidity makes it difficult to buy and sell.
The forex market is highly liquid (i.e. higher amount of transactions and volume), especially in the major currencies (e.g. EUR, USD and GBP). There are few price gaps. Since the market is liquid, execution prices are better and it’s easier to buy and sell. That’s the major difference between forex and stocks.
Forex tends to have tight spreads and low transaction costs. That’s because of the high liquidity.
The stock market has less volume traded and therefore is less liquid. This increases transaction costs to make money for brokers.
(We’ll find out how forex brokers make money in another lesson.)
Forex never stops!
Well, technically, the market stops on the weekend.
But currencies can be traded at any other time. You can trade whenever you want ― day or night. You can work around your busy schedule.
Stock markets average eight–hour trading sessions. The trading time depends on the country. With plenty of time between trading sessions, stock prices can open higher or lower than where they closed the previous day.
This is a major risk for stock market traders.
I’ve seen stock prices move 50% lower ― or more ― on the open. If you bought shares on the previous daily close and there’s bad news the next day, you could lose 50% overnight! This doesn’t happen in forex because the market is liquid.
Forex brokers have two choices for trades.
The standard model, where you don’t need to pay commissions. The second option is the commission model, where you receive tighter spreads. Remember the spread is the difference between the bid (sell) and ask (buy) price. The spread is how forex brokers make money.
Spreads are quite transparent.
You’re able to see them before trading and calculate the costs per trade. But if you choose the commission option, the commission will be added when you enter the trade. For example, when you open a trade, you’ll have a small initial loss as you’ll need to cover the cost of the commission immediately. If the trade starts to go in your favour, the loss will turn into a profit.
If you’re scalping or day trading, I’d go with the commission option. Forex commissions are small. So don’t worry about them. Commissions are the cost of doing business. If you’re position trading or short–term trading, I’d go with the standard option.
When trading stocks in many countries, the commissions are very large. In some countries, such as the US, commissions on stocks are zero.
You need to shop around.
Good forex brokers tend to offer similar commission and spreads.
Don’t get hung up on the trading costs too much. That’s the last thing you should worry about. Commissions are the cost of doing business. If you have a solid trading plan and know how to execute a trade, you can make life–changing gains trading either stocks or forex.
Forex brokers offer a staggering amount of pairs for trading. But there are eight main pairs, which trade the most volume.
In the stock market, there are thousands of stocks to choose. The New York Stock Exchange alone lists over 2,800 stocks. It can be quite daunting to know which stocks to trade, if you’re a beginner.
Also, stocks can go to zero ― many do.
If a stock goes bankrupt, you can lose everything. Forex pairs can’t go to zero or go bankrupt. Plus, there’s more to analyse with stocks. You need to analyse the management team, business fundamentals, balance sheet…and the overall market conditions. In forex, you just keep track of a few currencies!
Have you thought of trading other markets?
Some examples are gold and oil.
The other markets are similar to forex, if you’re trading CFDs or futures. They too have long trading sessions, low costs and offer massive leverage.
Difference between forex and stocks ― which one’s for you?
There are pros and cons to trading both markets.
Do you want to trade with leverage and low costs?
Do you want to trade a few currencies? Or do you want the challenge of trading multiple stocks?
Do you want to be an active trader or do you prefer investing?
If you want to trade more actively, or if you prefer bigger markets with more volatility, the best choice for you is forex.
Your ‘Start With Forex’ takeaway: The Difference Between Forex and Stocks
You need to follow thousands of companies as a stock trader. That can be daunting if you’re starting off, especially if you’re still learning about the difference between forex and stocks.
Stocks go in and out of favour.
With stocks, unless you’re trading CFDs, you have to put up the full capital straight off the bat. You can buy currencies on margin in forex. The biggest risk for stocks is they can go to zero ― bankrupt. No company is safe, even those considered blue chips:
Currencies can’t go to zero in forex.
There are also only several pairs to trade.
I come from an equities analysis background and love trading stocks. But forex is much easier if you’re interested in current events, prefer technical analysis (trading from charts), and like the idea of trading on margin.
If you’re ready to learn about forex liquidity and what is free margin in forex, click here.
To your trading success,
Start With Forex
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