For those who do not know any better, knowing the difference between forex and stocks might not be so easy. What most people know is that stocks and forex have within them the opportunity to make loads of money.
So, how exactly, is forex different from stocks?
Forex is primarily a short-term investment. Most traders buy and sell within a 24 hour period, sometimes it takes even only a few minutes to close a forex transaction. This is unlike stocks, where investors can hold on to their stocks for the long haul and wait for dividends to be paid out. In forex, the brokers earn their money by setting the spread – or the difference between the asking and selling prices. Stock brokers earn through commissions or a large brokerage fee.
Within the forex market, around $1.5 trillion dollars is being transacted daily. The stock market only handles a fraction of the amount: in American stock exchanges the total daily transaction is only worth $100 billion. The huge trading volume in forex only means that it is one of the most liquid markets in the world. There is always a buyer and seller for any given currency at every turn. The stock market does not have this kind of trait precisely because forex is dependent on the world market and in the transfer of goods from country to country.
The forex market is not centralized, and forex trading markets can be found worldwide. Given the different time zones, it is possible to trade 24 hours a day and five days a week.
Stock exchanges, by contrast, have more limited trading hours. Therefore it is possible to trade stocks worldwide, each stock exchange is independent from the other and typically only operates seven hours a day. Also, if a stock is traded on a particular exchange, it is not possible for it to be traded elsewhere.
Forex is a more predictable instrument than stocks. Forex prices have historically followed well-established trends. A forex trader need only to draw up a trading strategy based on a combination of fundamental and technical analysis to maximize profits. Stock markets, on the other hand, have historically suffered from “insider trading” scandals.
This advantage of relative stability in forex is supplemented by the fact that it doesn’t take so much money to get started in forex. There are forex mini accounts available as low as $25, and you buy and sell at 100 times your actual deposit.