Many investors have been used to trading in the stock market and are conversant with its ways. Currency trading on the other hand is rather a new experience to many who have not paid any attention to it before this as it was the monopoly of the big time players in the world of finance such as central banks, governments, hedge funds and other financial institutions. The two markets are quite similar in their make up and yet they have distinct features that set them apart. Even the investment opportunities that are available in the market differ to a great degree.
Market transactions
The stock exchange deals in company stocks which are listed in the stock market of any given country. There are thousands of stocks being traded and the investor has to have a good knowledge as to what stocks will bring in the best profits. This need to be studied closely and even then is not an easy task to keep track of all the different stocks in the market. In contrast, the currency market generally trades in currency pairs and the majority of the transactions are done with the main currencies which are only about seven in number. Therefore, a trader in the currency market has to keep track of these seven currencies in order to make profits from trading currency online.
Leverage on offer
Both markets offer traders leverage to facilitate better trading. The stock market leverage is generally 2:1 and this is just a fraction of the Forex market leverage which can be anything up to 400:1 or at times even exceeding this limit. Very large ratios are the norm for the currency trade due to the fact that currency movements are otherwise insignificant. On the downside, the losses incurred in the Forex market when trading with leverage can be much heavier than the stock market.
Operational times and methods
The stock exchange in each country works with the business hours and has a central exchange where it is regulated. This is quite unlike the Forex market which is operational day and night throughout the working week and stops only for the weekends. The Forex market has no regulatory body that governs it as it is an ‘over the counter’ market. There are simply no restrictions to trade and thus traders are active at all times. The less rigid trading environment is certainly a boon to traders and they have the added advantage of being able to profit from both rising markets as well as falling markets.
Execution of orders
In the stock exchange there might be a disparity between the actual price and what you may think you are getting. In the Forex market orders are executed without delay and this leaves no room for slippage. Apart from this, the Forex trader does not have to pay any commission other charges to the Forex broker other than the spread. This is not the case with the stock exchange where the trader has to pay a commission. Another distinct feature of the stock market is the fact that it is sometimes cornered by certain forces. This cannot be done in the Forex market as it is too large for any one force to have any influence over the way the market is going.
Considering all the above facts we see that the stock market is more regulated and has a better trade environment than the Forex market. But, the Forex market is more flexible and gives the trader unlimited trading opportunities and thus is far more popular than the stock exchange.