There are various investment opportunities in the financial markets, with stock and forex being two of them. Stock trading entails the buying and selling of shares of public companies, while forex (or foreign exchange) trading is centered on the trade of currencies within a global, decentralized market.
With technological advancements, traders now have access to sophisticated tools such as a forex trading app, making it easier than ever to enter and navigate the forex market. But what makes forex unique compared to stocks? In this article, we’ll explore five key reasons why many traders prefer the currency market over equities.
The Largest and Most Liquid Market in the World
Forex is the largest financial market in the world, with a daily volume of over $7.5 trillion. Liquidity allows easy entry and exit of positions for traders, eliminating slippage and allowing quick execution compared to stock trading.
Why Forex Liquidity Matters
- Less Spreads: Because of the high volume of transactions, the bid-ask spreads are minimal in forex trading, keeping the cost of the transaction low.
- Reduced Market Manipulation: The massive size of the forex market is such that no single entity can manipulate prices, as compared to stocks, where large institutional orders or insider transactions can move markets.
- Ease of Entry and Exit: In contrast to some stocks that have low volume trading, leading to price gaps, large forex pairs such as EUR/USD, USD/JPY, and GBP/USD trade continuously, making it easy to exit and enter.
For a trader who is utilizing a forex trading app, this liquidity allows them to have orders executed immediately with little slippage despite volatile markets.
24-Hour Market for Uninterrupted Trading
Contrary to stock markets that are set to trade within specific hours in accordance with local exchanges, forex is a rolling 24-hour market with major trading centers around the world operating as follows:
- Sydney Session: It opens at 10 PM GMT
- Tokyo Session: It opens at 12 AM GMT
- London Session: It opens at 8 AM GMT
- New York Session: It opens at 1 PM GMT
This continuous operation means traders can enter and exit positions at any time, accommodating different time zones and lifestyles. For example, a trader in Asia can participate in the London session, while a trader in the U.S. can engage in the Tokyo session.
How This Benefits Traders
- Greater Opportunities to Trade: While stocks are open and close on a daily basis, forex traders have opportunities available at all times.
- Convenience for Part-Time Traders: Individuals who have full-time occupations or other commitments can trade forex after their job without having to miss trading activity.
- Fewer Gaps in Prices: Stock traders regularly encounter gap risk when announcements and news result in large price moves during closing hours compared to opening hours. Trading on Forex continually lessens such risks.
If traders have an appropriate forex trading app, then they can scan price movements and place trades at any location with the assurance of never missing out on a potentially lucrative deal.
Leverage and Margin Trading for Greater Potential Returns
One of the characteristics that distinguish forex trading is the use of high leverage, which enables traders to open large positions with a small initial amount of money. However, it’s important to clarify that the use of leverage amplifies both potential profits and potential losses. This means that even a small market fluctuation in the opposite direction of your trade can cause significant losses, and in some cases, it can exceed the amount of margin you have in your account.
Understanding Leverage in Forex vs. Stocks
- Forex Leverage: Brokers often provide leverage as high as 100:1 or even 500:1, allowing traders to control positions worth $10,000 or $50,000 with just $100 in the account.
However, to protect retail traders from excessive risk, various regulators across different jurisdictions impose leverage limits. In regions like the European Union and the United Kingdom, regulatory authorities set a maximum leverage of 30:1 on major currency pairs.
This means that for every $1 in a trader’s account, they can control up to $30 in positions.
These leverage restrictions are designed to prevent traders from taking on more risk than they can manage, particularly in volatile markets, and to promote responsible trading practices. - Stock Leverage: Stock exchanges normally offer at most 1:2 (or 1:4 to day traders) leverage, significantly reducing buying potential.
Advantages and Disadvantages of High Leverage
Advantages:
- Enables traders to leverage their returns with little capital.
- Maximizes trading possibilities for small accounts.
Disadvantages:
- Increased leverage results in increased risk, so good risk management is important.
- A small price move against a position can trigger margin calls if not well managed.
Most forex trading software has inbuilt risk management options, including take-profit and stop-loss features, which assist the trader in utilizing leverage properly.
Transaction Costs Are Less Than Stocks
Trading in shares has numerous costs, including commission paid to a broker, fees to an exchange, and regulation charges. While there are a few stockbrokers that have commission-free transactions, they counter this by making bid-ask spreads wider.
Why Forex Has Lower Costs
- No Commissions (for Most Brokers): Most forex brokers trade on a spread-only basis, so the only cost traders pay is the bid-ask difference.
- Minimal Exchange Fees: In contrast to stocks that have to be routed through exchanges and possibly charged fees, forex trading is decentralized, reducing middleman expenses.
- Narrow Spreads on Major Currency Pairs: Popular currency pairs may have spreads of 0.1 pips or less, making trading very cost-effective.
Through a reputable forex trading application, traders are able to make an easy comparison of spreads and fees before opening trades, which ensures they earn the most.
A Decentralized and Accessible Worldwide Market
The forex market is over-the-counter (OTC), and there is no central exchange. Transactions are instead made electronically through interbank networks, online brokers, and liquidity providers.
Benefits of a Decentralized Market
- No Market Closure Risks: Trading halts cannot be imposed in forex, unlike stock markets, and forex is open under all market conditions.
- Protection Against Insider Trading: Stock markets are susceptible to insider trading, by which corporate bosses or investors accrue unfair profits. Forex is a huge decentralized market, in which such tampering becomes an impossibility.
- Facility for Retail Investors: All a person needs for trading forex is an internet connection and a forex trading software application, and retail traders can engage in forex anywhere in the globe, defying barriers that inhibit stock market membership.
Also, traders do not have to be concerned about the fiscal health of a single business, as forex operates on global economies in contrast to standalone corporations.
Is Forex Trading Right for You?
Forex trading provides a special combination of benefits, such as high liquidity, 24-hour access to markets, leverage potential, low cost of transactions, and decentralization. For flexible and global opportunity-seeking traders, forex is an attractive alternative to stocks.
But forex trading needs discipline, a good risk management plan, and a good forex trading app to track the markets well. Whether you’re a new or seasoned trader, knowing these advantages can guide you in determining if forex is your market.
Key Takeaways
- Forex is the largest and most liquid market, with instant trade execution.
- It is open 24 hours a day, providing convenient trading opportunities.
- High leverage choices allow the trader to manage big positions with limited capital.
- Low transaction costs make trading in forex cost-effective as against stocks.
- A decentralized market system minimizes risks arising due to insider dealings and market manipulation.
For those looking to embark on their forex experience, selecting a reliable forex trading application is paramount for easy trade execution and market analysis.
