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You’ve learned in the previous lessons about the advantages of forex trading. Stocks are another traded financial asset that is often compared with forex.
You don’t really have to choose between forex and stocks; you can trade both if you want to diversify your investment portfolio. However, for the purposes of this lesson, we’ll go over the differences between the two.
Before we discuss the differences between forex and stocks, look at this table comparing the two.
Criteria | Forex | Stocks |
Market Hours | 24 hours a day, 5 days a week | Depends on the exchange |
Trading Volume | USD 6 trillion daily average | USD 200 billion total daily average |
Market Manipulation | Highly improbable | Possible and has happened in the past |
Commissions | Minimal to none | Yes |
Leverage | 50:1 to 200:1 | 2:1 to 4:1 |
Regulatory Oversights | Limited | High |
Both forex and stocks markets are available five days per week. However, the forex market operates 24 hours a day. In contrast, stock markets typically mirror the business hours of their local area.
For instance, the New York Stock Exchange (NYSE) is open from 09:30 AM EST to 04:00 PM EST (01:30 PM–08:00 PM UTC). Meanwhile, the Tokyo Stock Exchange market hours are from 09:00 AM–11:00 AM JST (12:00 AM–02:00 AM UTC) and 12:30 PM to 3:00 PM JST (03:00 AM–06:00 AM UTC).
Additionally, although both markets close during holidays, there are more holidays on which you can trade in the forex market but not in stocks. This is because of the forex market’s decentralized nature.
Stock markets are tied to their localities. The NYSE, for example, is directly affected by local holidays in the US (e.g., Thanksgiving and Independence Day). It may also close during national days of mourning, as the US did for its late president, George H.W. Bush, in 2018.
On the other hand, the forex market can simultaneously be closed and open during holidays that are not observed globally. For instance, it may be closed in Japan during the Emperor’s Birthday celebration but remain open elsewhere.
However, the forex market does close across several regions during widely celebrated holidays, such as New Year’s Eve and New Year’s Day.
By this time, you’re probably tired of hearing that the forex market is the world’s most liquid and largest market in terms of volume. Every day, an average of USD 6 trillion (that’s SIX MILLION MILLION) is traded globally in the forex market.
This enormous amount makes the stock market’s daily average of USD 200 billion look tiny compared to the forex average.
Imagine comparing the height of a 5-story building with the Empire State Building in New York. That’s how the stock market trading volume compares against the forex trading volume.
The ability of any one player to manipulate the market is another area that shows the stark contrast between the forex and stock markets.
The sheer size of the forex market makes it largely immune to manipulation by a single entity. For instance, if a large commercial bank bought hundreds of millions of a given currency, it likely wouldn’t affect other trades.
It would take the coordinated efforts of multiple major market players to enable even a short-term manipulation of market prices.
Contrary to forex, a big enough company or group of retail traders can influence price movements and manipulate the market regarding stocks.
The 2021 GameStop stock price surge is an example of how the concerted effort of retail traders can drive the prices of a particular asset.
Following Robinhood’s steps, most forex brokers are now commission-free. This means you don’t have to make additional payments to trade in their platforms. Many brokers also have tight and transparent spreads per trade to attract clients.
Overall, these factors make trading forex significantly less expensive than stocks.
In comparison, stock trading has more associated fees. For one, stockbrokers charge commissions per trade, varying prices depending on the client’s asset size. There are also SEC and exchange fees, neither of which apply to forex.
Leverage limits further differentiate trading stocks and forex.
In stock trading, you can use up to 2:1 leverage on your trades if you have a margin account. You can increase this up to 4:1 if you’re a day trader with a maintaining balance of at least USD 25,000. However, you must meet certain requirements before brokers let you trade with this leverage.
When trading forex, you can have as much as 50:1 to 200:1 or even higher leverage, depending on your broker’s margin requirements. Unlike stocks, you only need to create a trading account to be eligible for leveraged trading.
As an over-the-counter market, the forex market’s regulatory oversight is limited compared to the stock market.
No central exchange oversees forex trading, so you must always conduct due diligence before selecting brokers. While the lack of central regulation makes trading forex riskier, it allows you to control larger positions more easily through leverage.
However, it doesn’t mean that no regulation exists over forex. There are many financial oversight committees worldwide that oversee broker regulations, such as the:
Stock markets have centralized exchanges and, therefore, more regulatory oversight. For instance, companies listed on exchanges, such as the NYSE, are legally required to disclose information needed by the US SEC. This makes the stock market more transparent than the forex market.
In the next lesson, you’ll see how trading forex compares to trading futures.