Foreign Exchange Market Over Stock Market
 

Foreign Exchange Market Over Stock Market

In today’s life, investors have access to an ever-increasing number of trading instruments which include blue chips, indices, and foreign exchange market. Choosing a good market to trade with is then not as easy as one would think. For this reason, traders need to think of some factors to make the best possible choice.

Long-term investors are more suited to trading in the stock markets, where short-term traders prefer markets where the effects of price volatility are felt to a greater extent.foreign exchange market Here we’ll look at the differences between foreign exchange and stock trading and why the majority of traders usually choose foreign exchange over stocks.

The Difference Between Foreign Exchange Market and Stock Trading Market

The main difference between foreign exchange market(also known as Forex trading) and stock market is the amount of trading alternatives available. The foreign exchange market has just a few option to choose from, whereas the stock market has thousands of options from which to choose. As most Forex traders focus on four major currency pairs for example; the EUR/USD, USD/JPY, GBP/USD and USD/CHF. It’s quite clear that the currency trading is easier to follow.

Rather than choosing between 10 000 stocks to find the best value, foreign exchange traders are more focused on staying up to date on the economic and political news of the countries in question. For this reason, it’s harder to find success in the stock markets than in Forex.

The Advantages of Forex Over Stock Trading

There are many reasons why people would want to look at foreign exchange rather than the traditional stock trading option. These reasons are as follows:

Manageable Amount of Trading Options

It’s so easy to choose a currency to trade instead of choosing from thousands of stocks. Stocks can decline even in a bull market if it’s not the best stock in its peer group or if a trader in not in the right sector. Many times, a sector or stock will fall as the general markets rise, so an investor needs to be either very good or very lucky at choosing stocks.

The currency market has far fewer choices, and that makes a trader’s job much easier. Most foreign exchange traders stick to the big pairs and it’s a fact that most currency trading is between the euro and the US dollar. Even if a trader left the EUR/USD, there are only a few other major pairs and by watching those, traders are watching the world. Should a trader expand his Forex trading into other types of currency pairs, it’s a breeze compared to the tens of thousands of stocks that exist. In that regard, currencies are much easier to follow.

Liquidity

Equity markets are much smaller than currency markets, with the daily trade volume in foreign exchange more or less ten times larger than the combined size of the world’s stock markets. So in essence, it’s a very liquid market. Due to the high liquidity of the Forex market, margins are small, and leverage is high. Finding such a low margin rate in the stock markets is impossible as the majority of traders need to have around half the value of their investment in their margin accounts. Meanwhile, Forex traders only require an amount as small as one percent.

Trade Round-the-Clock

Foreign exchange market trades around the clock, meaning that if the price spikes after hours, and you are a short-term trader, you can change your existing option or enter one without having to wait until the market opens the next morning. Forex market liquidity stays deep for most traders around the clock, should the currencies liquidity be less; it doesn’t matter to most traders as the liquidity is fine even then. Spreads also stay tight with the EUR/USD exchange rate typically being two pips or less and though it might even go to 3 pips when liquidity is not as high, there are still rarely a significant widening in the spreads.

Flexibility

Foreign exchange offers the flexibility to move from long-term too short-term with ease which doesn’t happen with stocks. Trading opportunities exist regardless of whether a trade is long or short, so traders always have equal access to trade in a rising or falling market. With stock markets, the stock market can quickly hit a lull which results in declining volumes and activity, making it difficult to open and close positions when the trader would like to. More than that, in a declining market it’s only with extreme dexterity or luck that a stock market investor can make a profit. With foreign exchange, the trader can benefit from both rising and declining markets as buying and selling at the same time is a part of every trade.

Volatility

The forex market experiences a lot of volatility which is ideal for aggressive traders. Also, currencies are also well-known for staying with the trend for quite a long time despite their volatility.

Commissions

Commissions in the foreign exchange market tend to be much higher when compared to stock markets. Traditionally, stock brokers charge commission fees on top of their spreads, as well as fees that have to be paid to the exchange. Most forex brokers don’t charge commission or any additional transaction fees to trade currencies online.

Forex trading costs tend to be lower than in other markets, and most brokers receive payment for their services using bid/ask spreads.

As you can see, there are many reasons why traders prefer foreign exchange rather than stock exchange. To put it simply, the benefits of trading currencies in the globally accessible forex market are enormous and outnumbers those of stock trading. It all comes down to a trader’s personal preference and risk tolerance.


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