Forex Market vs Stocks

Most people with investment experience are familiar with the stock market. So how does Forex compare with stocks? Are there any similarities or are they completely different?

Both the Forex market and the stock market share some features, but the differences outweigh the similarities. Nevertheless, if you are familiar with the stock market, that experience will help you grasp the fundamentals of Forex market trading.

The biggest difference between Forex market trading and the stock market is the time frame of each individual trade. Stocks are traditionally a long-term investment and so-called blue chip stocks are usually the foundation of an investment portfolio.

Short Term Trades

Short-term trading in stocks has become more popular with the introduction of Internet trading, but the time frame of stock investments is usually much longer than that of Forex market trading.

Most traders on the Forex market enter and exit positions within a 24-hour period. In fact, most brokers charge a fee for holding a position after the market has closed for the day. Because of the constant movement of the Forex market, many positions are held for less than an hour.

Margin is the backbone of Forex market trading, and the average investor can participate in the Forex market with a typical leverage of 100:1. Margin trading is also done on the stock market, but the margin rate is usually about 50% (2:1).

This means that investors can participate in the Forex market with a relatively small account, and yet still have the possibility of excellent returns.

The Markets Compared

The stock market has existed for hundreds of years. Companies issue stock in order to raise capital for expansion or other business activities, and stock ownership gives the investor partial ownership in the company.

When a company makes a profit, the value of the stock increases, but if the company does poorly, the value of the stock will decrease. Stock price movements are usually quite slow, but the stock value of a well performing company should continue to rise over the years.

The Foreign Exchange Market (Forex) is the largest financial market in the world, handling transactions of $1.5 trillion every day. Compare that with all the stock exchanges in the United States, which combined handle daily transactions worth about $100 billion.

Large Volume

The large volume of the Forex makes it the most liquid market in the world. There is always a buyer and seller for any type of currency.

The Forex exists because of global trade and the necessity of changing one currency into another. Even though the price movements in currency are quite small, the fact that Forex market trading is done on margin allows small price movements to translate into large profits (or losses).

The Forex market follows identified trends, so knowledgeable investors can usually predict how the market will move. Inexperienced Forex traders, however, may make serious mistakes causing them to lose their initial investment.

The key to successful Forex market trading is education. An uneducated Forex trader is at the mercy of his or her emotions and will almost certainly make the wrong decisions. Learning about the Forex market trading is the only way to become a successful Forex trader.