Forex vs Stocks – Which Is Better?

In many ways the Forex market is very similar to other financial markets, however, there are differences and those differences offer great advantages to those who trade Forex.

ACCESS & CONVENIENCE

Stock Market:
• Business day ends = Trading stop
• Trading stops = Large price gaps
• Lack of transparency = Surprise announcements

Forex:
• Market open 24 hours 7 days a week*
• Market rarely gaps
• Scheduled release of announcements is public knowledge

*Forex is a 24 hour 7 day a week market. However, many brokers close their platforms, and stop your ability to trade, from the close of the New York market on Friday until the opening of the Asian markets on Sunday (US Eastern Time). There are no opening and or closing bells during the time frame mentioned above. In many cases, this allows anyone in the world to develop trading strategies for the forex market and the freedom to trade or not to trade when it fits their personal schedule.

LIQUIDITY

Stock Market
• Plus or minus 40,000 stocks at various exchanges
• Trade executions can experience significant delays
• Subject to price substantial price slippage

Forex
• 6-10 major currency pairs
• Most of the time there is instantaneous trade execution at market rate
• Seemingly unlimited liquidity due to the size of the market

The Forex market is larger than any other financial market in the world. In fact, it is larger than all of the other financial markets in the world combined. This liquidity helps to provide price stability and almost always offers a trader the opportunity to open or close a position at a fair market price. This enormous volume reduces your stalled trade executions. The large number of brokers through which you can process your trades, greatly reduces the spread you pay to enter a trade. With real-time data available anywhere in the world there is an Internet connection all traders have access to trade under these most ideal conditions.

LEVERAGE

Stock Market:
• 1:1 leverage typical, 1:2 at the very best
• Small account can be very risky (‘penny stocks’)
• Diversification into different equities can require substantial capital

Forex
• Open account with $500 USD
• $120 controls a $10K ‘lot’ (mini account)
• Up to 400:1 leverage

Many Forex brokers offer up to 400:1 leverage, much higher than the 2:1 by equity brokers or 15:1 by futures brokers. This effectively allows you to use a $1000 margin to control a $100,000 position at 100:1 leverage. The use of higher leverage is due to the small average daily percentage move of a major currency, which is less than 1%, whereas a stock can easily have a 5%-10% price move on any given day. A trader’s first thought usually is “this leverage will provide great profits”…while this is true…it can also result in some extraordinarily large losses. This higher leverage puts extreme importance on having and abiding to a money management plan- something we will be instructing you in and reminding you of constantly.

LOW TRANSACTION COST

Stock Market:
• High commissions
• In addition to commissions you have to pay the spread between the buy and the sell.

Forex:
• NO exchange fees
• NO commissions from most brokers
• NO brokerage fees
• Just a small buy/sell spread

Most Forex brokers do not charge commissions. When trading, there is a “Bid” and an “Ask” price. The differences in these two prices are called the spread. Typical spreads are in the range of 2-5 pips. This is the “Traders Cost” to execute a trade. By comparison commissions for stock trades range from $6.95 to $29.95 and on average $12.00 to $15.00 for futures trades, in addition to these fees you must also pay the spread.

SHORT AND LONG POSTIONS

Stock Market:
• Larger Margin Required
• Pay Dividends
• Up-Tick Rule- cannot short a stock while it is moving down you have to wait until price moves up. This rule has currently been removed and under review to be reinstated.

Forex:
• No Dividends
• No Up-Tick Rule

When a position is opened in the Forex market, a trader is long one currency and at the same time short the other currency it is paired with, that is why there is no Up-Tick rule in the Forex. Yes, we agree that sounds a bit confusing at first but you will get the hang of it over time.

Here is an example: If you are trading the EUR/USD and you think the Euro is going to get stronger you will make a ‘buy’ purchase expecting the price to go up on the chart. Because the currencies are paired with each other, when you make that ‘buy’ purchase of the Euro you are at the same time shorting the US Dollar. If price does move up that means the Euro is strengthening and the US Dollar is subsequently weakening.

Again, do not let this short/long section throw you off. Just accept what you have read and you will see plenty of examples that will make this concept clear to you throughout the course.

An easy way to remember what you are doing, is that if you expect the price on a chart to go up, you push the ‘buy’ button; if you expect the price on a chart do go down, you push the ‘sell’ button.