1.6 Forex Trading Vs. Stocks Trading

A comparison between the FX and stock markets makes for interesting reading, but FX really walks away with the honors.
 

Where FX scores over stocks

Forex and stock comparison - Forex market is much larger  

  • Focused trading. The number of stocks is very huge and picking a stock could be like looking for a needle in a haystack. The number of stocks listed on the Nasdaq is 3600, drawn from 46 countries. Issues listed on the New York Stock Exchange number over 8000. In stark contrast, the FX market trades a large number of currencies, but the trading volumes are really concentrated in the six major pairs.

 

  • Great execution. In the FX market, due to its enormous liquidity, orders get executed instantly and usually prices are real-time and ‘what-you-see-is-what-you-get’. Barring exceptional circumstances, slippage is far less.

 

  • Lower execution costs. Most FX brokers would be charging the client only the bid-ask spread and rarely anything by way of commissions. (However, some brokers known as ECN brokers, charge variable spreads along with a nominal commission). 

 

  • Flexibility of trade times.  The FX market being a 24-hour market, it is very easy for a trader to pick a convenient time for transacting. This enables many people to take up FX trading as a second vocation, in addition to their usual job or business. In contrast stock markets are closed by 4 p.m.

 

  • No restrictions on short trades. The FX market does not feature short selling restrictions that prevail on the stock markets (e.g. short sale related circuit breakers). One can place a short trade regardless of the conditions prevailing in the market, or one’s own existing position in the pair. (However, there are restrictions in some countries on ‘hedging’)

 

  • Media influence. Stocks players are faced with a barrage of media coverage of stocks ranging from ‘expert’ analysis, brokerage ratings, TV discussions, buy-sell calls and internet forums that all combine to influence the price of the stock. The FX market is just too big to be impacted in this manner and is free of this kind of market manipulation.

 

  • Influence of trades by large players. Trades by large players such as hedge funds, mutual funds, high profile investors and sovereign wealth funds significantly affect the price of a stock. However, because of the size and liquidity of the FX market no entity can lay claim to control a currency pair.

 

Where stocks score over Forex

 

  • Settlement guarantee. Stocks, being traded on centralized exchanges enjoy the backing of clearing guarantee corporations that ensure the settlement of a trade. No such guarantee facility exists on the FX market, which is an OTC market, with a wide variation in the kinds of brokers and players who participate. Some brokers may be totally unregulated.

 

  • Leverage, the double-edged sword. The FX market can be a dangerous place for the average retail trader due to the options available for trading on very high leverage. If the trader does not understand the risks that come with leverage, he may extinguish his account equity in a short while. The stock market does not afford such leverage luxury, and to that extent is safer.

 

  • Dividends and bonus stocks. Keeping invested in a stock for longer time earns you dividends and you may also profit from the issue of bonus stocks, stock split etc but in Forex trading such features are not there. You may earn interest rate differentiation if you have bought a currency with higher interest rate but apart from that your profits and losses are only because of the price going up or going down.

 

 
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