The Differences Between Stocks and Forex

For investors that have mainly traded stocks, adjusting to the nature of the Forex market can be somewhat daunting. There are numerous differences between the two markets, but investors should at least be aware of some of the basics if they are looking to expand into Forex trading.

24-hour market

Unlike the stock market, the Forex market is open 24 hours a day, 5 ½ day per week. This is because, unlike the stock market, which is generally centered around the time zone of a specific country, the Forex market involves trading different currencies against one another, and is therefore inherently global. The Forex market officially opens in Australia, then moves into the Asian session, followed by the European session and finally ending in the Americas, before repeating the cycle again.
This means that there can be many more trading opportunities in the Forex market (since it is open longer), and also less of a gap risk than the stock market. This allows Forex traders to have a more accurate sense of risk management for their trades than many stock traders, who are often at the mercy of the market opening at a significantly different level from where it closed.

Highly liquid market

The Forex market is by far the most liquid market in the world, with a daily trading volume in the trillions. On a daily basis, there is more than 10 times the trading volume in Forex than on the NYSE. This means that liquidity is generally far less of a concern in Forex than it is in the stock market. While it would be incorrect to say that liquidity is guaranteed in Forex, it very rarely becomes a significant concern. This allows Forex trades to easily enter and exit positions at the desired price, as opposed to the stock markets, where they might not be able to do so.

No centralized exchange

Spot Forex is one of the few financial instruments that isn't traded over an exchange; instead, transactions occur directly through global networks of banks and institutions, known as the interbank network. This means that the Forex market isn't subject to intervention from an exchange, allowing for smoother overall trading.

Leverage

Leveraging capabilities in the Forex market are virtually unparalleled, with brokers generally offering anywhere from 50:1 to 400:1. The rational for such leverage is that Forex traders are generally trading very small increments of movement (many cross pairs are quoted down to the 4th decimal place), and thus require more leverage to properly trade. The leveraging capabilities of the stock market, in contract, are often limited to 2:1 in a margin account.

Limited regulation

The stock market is regulated by the Securities and Exchange Commission (SEC). In contract, Forex is very loosely regulated. The regulatory bodies responsible for Forex are the NFA and CFTA, but they have much more limited oversight than their counterparts in other markets. This, however, has been changing over the last several years, with increased regulation expected in the near future.