Forex trading and Stock trading

Very many people wonder what difference there is between forex trading and stock trading. These two financial markets share a lot in common and for the uninitiated they may look like one and the same thing. However, they are very different in form, function, and many other different ways.

Leverage

Of all the differences between these two giant financial markets, the most glaring is their respective leverage levels offered by brokers. A stock trader can get leverage of about 2:1 in the US though in some countries that may go up to 15:1. Additionally, there is a rigorous process involved in qualifying for any type of leverage in the stock exchange market and thus most traders have very limited financing options from their brokers.

On the other hand, the forex market is known for its high leverage levels offered by brokers. In the US, this is now limited to 50:1 but in most countries you will get leverage levels of 200:1. In fact, brokers are increasingly offering higher leverage levels and it is now common to find brokers offering leverage levels of 300:1, 400:1, 500:1, and even higher.

Liquidity

When trading stocks, there are limited numbers of shares you can buy or sell within any particular stock exchange. Most company shares will cost from a few dollars to some hundreds of dollars. Trading on the forex market is a whole different ball game. The number of currencies to trade in is very high and the amount of currency you can buy or sell is unlimited. To further illustrate the difference in liquidity, the Bank for International Settlements (BIS) report for August 2012 shows that the stock market experienced a daily turnover average of $2 trillion. The same report shows a figure of $4.9 trillion per day for the forex market.

Trading Hours

When you are trading in stocks, you are limited to normal business hours. You can only conduct business during those times when trading is open in the centralized exchange market that you are operating from. For instance, if you are trading on the New York Stock Exchange, you are limited to trading Monday to Friday between 0800hrs EST and 1700hrs EST.

With the forex market, there is no centralized exchange and you can trade 24 hours a day 6 days a week. This makes is quite easy to fit your trading to your schedule even if you have other commitments. For instance, you can run your other business or work at an employed job during normal business hours and trade in the evening or whenever.

Bear Markets

The stock market can go into decline where most stocks will lose value. Stock traders may make profits by shorting during such moments but this is strictly regulated and extremely risky. The benefits of such a move are usually very little except if you are making a very large investment. On the other hand, in the forex market there never is a bear market. When one currency is in decline, others may not be.

And even in a case when both currencies in a pair are in decline, the forex trader can profit by selling the fast-declining currency and buying the one with the slower decline and reversing the transaction when the fast-declining currency attains its low. A forex trader also profits from selling high and buying back low so there really is no bear market in forex trading.

Regulations

The stock exchange market in any country is controlled through very strict regulations that brokers and traders have to adhere to. This restricts the number of brokers, traders, and other market players and makes it somewhat difficult to participate in the market. The forex market has no such qualms and is basically a free for all.

There are no limits to how much you can invest, when you can enter a trade, which currency you can trade in, how you can make currency trades, or what you can say about the market, particular currencies, or prices. In short, there is more freedom in the forex market.