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To a layman, trading is trading. Whether you’re dealing in commodities or currencies, there can’t be that big of a difference, right? Wrong. The forex market and the stock market vary greatly on multiple levels. Let’s take a look at some of the biggest differences.
When comparing market Infrastructures, it’s immediately clear that these two markets are entirely different.
Let’s look at the US stock market for example. This is a heavily regulated market that operates around one central exchange. This means that every time you buy an asset it has to go through one of the exchanges (NASDAQ).
Once the move is made, it’s immediately tracked so you and others can always see the flow of buyers and sellers. You can also see the time of sale and the amount of participants at any price level and the size of those participants. Traders who take advantage of this are known to “read the tape”
On the contrary, the Forex market doesn’t have this type of central exchange. It’s OTC (over the counter) trading.
Within the forex market, there are many different institutions which will enable you to transact currencies from the primary banks. This means that as a forex trader, you’re trading the assets of Merrill Lynch, Deutsche Bank, etc. In a decentralized way, these banks all set their own prices.
There is a difference in oversight as well, as the SEC oversees all trading in the US stock market. There are no such bodies maintaining an eye over the forex market though.
At the core of each market, lies an underlying purpose driving its movements. The stock market, for example, is a value-driven market. This means that you can make an investment and hold it for 20 years while you wait for it to appreciate to a certain level you’d like to cash it out at. This doesn’t happen in forex.
In forex, you can have a year-long or 2 year long trades but because you need to align your trades with the cyclical nature of economies, the movements happen on a more micro level. This is because the forex market is a hedging market. You need to play micro-events in the context of the larger, macro picture.
Who trades in the equity market? Massive players like pension funds, hedge funds, mutual funds, and then at the bottom, the lowly retail speculators.
In the forex market, the biggest players are the primary banks we mentioned earlier. Basically any FDIC commercial bank with lots of deposits under assets. These banks make up approximately 90% of the market.
When you’re in these different markets, you need to be aware of the big movers and their motivations.
Trading stocks usually requires greater capital than forex trading. This leads to forex being a more attractive option for casual traders looking to break into a market. However, the forex market relies heavily on leverage which means that while profits can be very large, a loss can potentially wipe out an entire account.
On average, the difference between the Bid Price and the Ask Price is lower in the forex market. While some large stocks have tight spreads, there are many other stocks that have wide spreads.
The forex market comes with close spreads because of the sheer volume that currency pairs have.
It should be clear by now that trading is not just trading. Looking into the intricacies of each market reveals fundamentally different trading grounds. If you’re looking to jump into either of these markets, consider your strengths, your capital, and your goals up against the strengths and weaknesses of each market.
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