Both the forex and the stock markets are heavily traded by a multitude of traders around the world. Many people prefer to trade in the forex market as compared to the stock market for a variety of reasons. There are several factors that make forex trading more enticing to a trader, giving them a clear edge over stock trading.
Before we can get into how the forex market is more advantageous than the stock market, we should understand what the stock market really is. Stocks represent the shares of a company, which are the ownership equity in the firm. It gives shareholders voting rights as well as a residual claim on any corporate earnings. This can be in the form of dividends and capital gains. The stock market is the place where institutional, as well as individual investors, purchase or sell shares inside a public venue. Presently, stock exchanges have extended to electronic market places as well.
Advantages of Forex Trading Over Stock trading
Manageable Amount of Trading Options:
The Stock market has approximately 2800 stocks listed in the New York Stock Exchange alone, with another 3100 listed on NASDAQ. This makes the process of stocks, a complicated affair. However, despite there being multiple forex pairs traded on the market, there are only 4 major pairs that are traded by most market players. Thus, traders have fewer choices to make. Even if they decide to extend their portfolio to other currency pairs, there are always some specific areas to focus on, compared to the myriad of choices in the stock market.
Another problem with stocks is that they can decline even during a bull market if the trader has not invested in the right sector. There are some sectors in the stock market that experiences decline, even if the condition of the general market is fine.
24 Hour Operational Market:
Unlike the stock market, the forex market is open 24 hours a day. Most brokers are open from Sunday at around 4:00 pm EST and operate till Friday at 4:00 pm EST. With a customer service team available always, and the ability to trade during US, Asian and European markets, traders can easily customise their own trading schedule to reap the benefits.
Market Orders Are Instantly Executed:
Under normal circumstances in the forex market, trades are executed instantly. The price is shown when the trader executes the market orders is the price the trader gets. This allows traders to execute trades directly off the real-time streaming prices. This is absent in the stock market.
It should be noted that under normal circumstances, many brokers tend to only guarantee limit, stop and entry orders. The fills are mostly instantaneous except under extraordinarily volatile market conditions.
No Middleman present:
The stock market consists of centralised exchanges which usually involve a middleman. The middleman can be any party or entity which is in between the trader and the buyer or seller of a particular security or instrument. Middlemen typically charge a fee.
The spot forex market, on the other hand, is decentralised and does not have any middlemen involved. Here, currency quotes can vary from different currency dealers. Because there is a degree of cut-throat competition in the forex market, traders often get cheaper costs as a result.
Short-Selling Without Uptick:
In the forex market, there are no restrictions when it comes to short selling. This results in various trading opportunities arising in the current market, regardless if the trader is short or long, or the direction of the market. This is not the same in the stock market.
Additionally, no structural bias exists in the forex market because it always involves buying one currency, while selling another. Traders thus have equal access to trade in falling as well as rising markets.
Analysts and Brokerage Firms have Less Influence on the Market:
The relationships between brokerages and analysts have been reported in the news before. There have been several past instances where analysts of prestigious brokerage firms have been accused and charged with keeping its own recommendations, such as buying when the stock was in a rapid descent. Despite many government interventions around the world, this type of activity is still persistent to this day.
The Forex market is largely devoid of this phenomenon. Besides analysing the market, analysts have little to no effect on the exchange rates prevalent in the forex market, making it a fair market for traders to trade-in.
Buy/sell programs have no control over the market:
The stock market overall is very susceptible to large fund buying and selling, as many past instances bear-proof. This is not so in the forex market.
The massive size of the forex market prevents any single fund or bank from controlling a single currency. Thus, banks, governments, hedge funds, retail currency conversion houses and large net worth individuals are equal participants and form a small part of the forex currency market.
Compared to the forex market, commissions paid in the stock market are way higher. Commission fees are usually charged by stockbrokers on top of their spreads. Traders are also required to pay fees to the exchange they are trading with. This is not the case in the forex market, where brokers charge no commission and little to no fees.
While speculating in stocks is not an unheard-of phenomenon, speculating is significantly cheaper in the forex market. This is due to the market’s large liquidity pool. In stock markets, speculation not only includes high costs but also requires significant capital from the trader’s end.
The stock market and the forex market are vastly different and come with different risk levels. Despite some advantages, stock trading falls short in many ways as compared to the forex market. Although the broader underlying principles are the same in both the markets, there is a definite advantage in forex markets when it comes to accessibility. The growth of online trading platforms and brokerage firms have further allowed a greater number of traders to access the international forex market.