We had previously learned about the definition of the Forex market, what is missing now is to know what is the stock market and the differences between the Forex market and the Stock Market.

Definition of Stock Market:

The stock market is a public market and a network of economic transactions for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.

The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market.

Comparison between Forex & Stocks Markets

Both the Forex market and Stock market involve some kind of risk. Even though the risks associated in trading Forex are generally higher, the Forex market has some advantages over the Stock market which makes the Forex market a very desirable trading ground. Some of these advantages are:

- Higher Leverage
- 24 Hour Trading
- Commission Free
- Short Selling
- Different Instruments

Higher Leverage:

Forex trading provides leverage that is much higher than in trading stocks. Although higher leverage usually means higher risk, the high leverage gives traders the option to benefit from the slightest changes in the market prices. For example, at a leverage of 1:100, the trader can invest only $1,000 and get the possibility to benefit from entering a $100,000 trade. If you put $100,000 into a currency and the currency's price moves 1% against you, the value of the capital will have decreased to $99,000 - a loss of $1,000, or all of your invested capital, representing a 100% loss. In the equities market, most traders do not use leverage, therefore a 1% loss in the stock's value on a $1,000 investment, would only mean a loss of $10. Traders should note that trading using leverage may increase potential gains as well as losses on any given trade.

Due to the extreme liquidity of the Forex market, margins are low and leverage is high. It is not possible to find such low margin rates in the equities markets; most margin traders in the equities markets need at least 50% of the value of the investment available as margin, whereas Forex traders need as little as 1%.

 

Though currencies don't tend to move as sharply as stocks on a percentage basis (where a company's stock can lose a large portion of its value in a matter of minutes after a bad announcement), it is the leverage in the Forex market that creates the volatility.

24 Hour Trading:

The Forex market is a true 24 hour market, unlike the Stock markets which operate during specific hours during the day. A trader can optimize his trading schedule based on his geographical location or according to his time schedule. The Stock markets often can hit a lull, resulting in shrinking volumes and activity. As a result, it may be hard to open and close positions when desired.

Commission Free:

Unlike the Stock market where there must be a middleman who charges a commission, the Forex market is a commission free market that requires no middlemen. It is a transparent market where brokers make their profit from the bid/ask price differences, also known as spreads. There are absolutely no hidden fees or charges to trade in the Forex market; all the trader needs to do is fund his account and he is ready to go.

Short Selling:

Traders in the Forex market can benefit from both the rising market (Bull Market) and falling market (Bear Market). Forex offers the opportunity to profit in both rising and declining markets because with each trade, you are buying and selling simultaneously, and short-selling is, therefore, inherent in every transaction although some stocks have the same option, this is somehow limited to certain conditions. . For example, it is difficult to short-sell in the U.S. equities market because of strict rules and regulations regarding the process. This means that a crisis or falling market is not necessarily bad for the Forex trader, in fact it can be very profitable. But in a declining stock market, it is only with extreme ingenuity that an investor can make a profit.

On the other hand, since the Forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position - as they are in the equities market.

Different Instruments :

Forex market has very few instruments compared to the thousands found in the stock market. The majority of Forex traders focus their efforts on seven different currency pairs: the four majors, which include (EUR/USD, USD/JPY, GBP/USD, USD/CHF); and the three commodity pairs (USD/CAD, AUD/USD, NZD/USD). All other pairs are just different combinations of the same currencies, otherwise known as cross currencies. This makes currency trading easier to follow because rather than having to cherry-pick between 10,000 stocks to find the best value, all that FX traders need to do is “keep up” on the economic and political news of eight countries.