Difference in trading stocks vs. forex

Written by Brian Tran
Last updated: Tuesday, 19 December 2007

Most traders begin their introduction to trading by buying stocks. As their knowledge grows they begin to explore different types of trading instruments and markets. Until recently, foreign currency or forex trading was a complete mystery outside of the banking world. But before getting into trading currencies, there are many differences from trading equities. The problem with forex for a beginner is where to start to gain that knowledge. With the Internet, many sites, brokerages and services offer guides to understand the market, but it’s still not as easily explained as stocks.

Here is a list of some of them:

• Trading session hours: forex market is open 24 hours vs. 6.5 hours excluding pre- and post-market hours.
• Trading pair vs. a singles issue – 2 currencies make up an instrument versus a single company making the issue.
• Liquidity – Although is there no record of volume being tracked, from US government report that the market exceeds $1.9 trillion/day (on average).
• Different leverage – forex markets offers from 50:1 to 200:1 leverage vs. 4:1 for equities accounts.
• Commissions – traditional forex brokers offer no commissions but they make money through spreads between the bid/ask (spread) price. Newer broker (non-dealing desk) charges commissions bid/ask spread is smaller. In equities, brokers charge commissions.
• Brokers – many different types of dealers with different requirements and software.
• Correlations to other markets – market in forex only correlate to other pairs in forex and interest rates and bond markets. Equity markets may correlate with other markets such as oil, bonds, interest rates.

From these differences, the results may appear in one market and not in another.

• Gaps rarely occur in forex unlike stocks due to the 24 hour open market. Small occasionally occur between the time the close of Friday and the opening on Monday due to some political or economic news to cause such fluctuations. These also occur on economic news during the week as such as interest rate announcements in the pairs in their respective countries.
• In major currency pairs (any currency paired with USD, GBP, CAD, EUR, AUS), liquidity is high. In stocks, large market capitalization stocks carry the highest liquidity.
• In forex, brokers are not as well regulated as stock brokerages. This fact is based on the fact that the market is not centralized and governed by a single entity such as the NYSE or Nasdaq. When not regulated, their leverage level offerings from one brokerage to the next (50:1 to 200:1). Another difference is there is a dealing-desk and non-dealing desk brokers. Another result of little regulated market created a dealing desks offer no-commission fixed-spread controlled quotes with non-dealing charge a commission but the spread are natural market quotes.
• In stocks, many traders follow the indices such as Dow and S&P to view the overall state of the economy and of the market to trade properly individual stocks. In forex, the economic and political policies are a fundamental guide. In technical analysis, following other trading pairs is a guide as the main correlation.
• With decentralized markets, the 24 hours come from different markets around the world opening and closing at different hours. The most important markets are London, Tokyo, Frankfurt, New York, and Sydney. Volume is high at anytime of the day. The NYSE and Nasdaq open and close at same time with no other markets involved in trading these issues. Exceptions are the pre- and post-market but these hours have little volume and participation.