FOREX Trading Vs. Trading Stocks

FOREX Trading Vs. Trading Stocks

While both are common investment fields, there are genuine and functional differences between Currency Trading and Stock Trading.

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FOREX Trading vs. Trading Stocks

Stocks have been a popular investment for hundreds of years. Companies normally issue stocks to raise capital for expansion and to fund new projects. Typically, each share of the stock represents a partial ownership in the company.

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When the company does well and makes a profit, the value of the stocks rise. Stock owners can choose to sell their shares for a profit or hold on to the stock for even more gain in the future. Sometimes companies will decide to issue dividends. These dividends are part of the profits that are distributed proportionately to the share holders.

The Stock Market

Stocks are usually traded on stock exchanges. Most stocks are bought and sold through brokers who charge a commission or fee for this service. American stock exchanges include the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ). 

Most stocks are only listed on one exchange, although large companies may be able to have listings on several exchanges.

Stocks have been traditionally seen as long term investments. So called 'blue chip' stocks - those having proven value over many years - may form the backbone of an investment portfolio. Short term trading is a relatively new phenomenon made possible with the advent of Internet trading. Day traders are those who attempt to take advantage of large daily fluctuations in the market by buying and selling many times in one trading period. Day trading is relatively risky and any profits realized are reduced by broker commissions charged on each transaction.

Stocks may sometimes be bought on margin, meaning that the investor borrows money to in order to buy the stocks. Margin rates are usually around 50% - the investor can commonly borrow as much as half the value of the stock.

The FOREX Market

The Foreign Exchange Market (FOREX) is very different from a stock exchange.

Whereas a stock exchange is still seen as a long term market, the FOREX is primarily a short term market. Most traders will enter and exit deals within a 24 hour period – sometimes within a few minutes. Many FOREX trades can be made in one day without building up a large brokerage fee because FOREX trades are commission free. Brokers earn their money by setting a spread – the difference between asking and selling prices.

As of this writing, the FOREX is quite simply the largest financial market in the world. It handles transactions worth $1.5 trillion every day. 

By comparison, all the American stock exchanges combined handle daily transactions worth about $100 billion. This huge volume that happens within the FOREX means that it is one of the most liquid markets in the world. There is always a buyer and seller for any type of currency because the world economy relies on the movement of goods from country to country. On the other hand, the stock market is less liquid because participants may choose to hold their investments as long term investments or move on to other markets.

Where is the FOREX, Foreign Exchange, Market?

The FOREX is not physically located in any one location. Trading markets are world-wide and, because of differences in time-zones, trades can be made 24 hours a day, 5 days a week. Trading begins in Sydney, Australia on Monday morning (Sunday afternoon New York time) and continues non-stop until Friday afternoon New York time.

Stock exchanges have more limited trading hours. While it is possible to trade on exchanges world-wide, each of these stock exchanges is independent and operates for only 7 hours a day. There is no way for an investor to buy or sell a certain stock that is only traded on a certain stock exchange when that exchange is closed.

What are other advantages of FOREX trading? 

It is more predictable than stocks. The FOREX market follows very well established trends; it allows high leverage – typically 100:1 instead of 2:1 on the stock market; and it doesn't require a large investment – mini accounts as small as $250 can get you started in FOREX.

Forex Trading


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Trading Stocks and FOREX
Page Updated 6:54 PM Friday 8/17/2012