Forex vs Stocks
Which is better for traders?
Forex trading has been around for 20 years, but it's still relatively new compared to stock trading which has been around for over 200 years.
But while the top 25 stock exchanges around the world sees a total trade volume of $317 billion a day⁽¹⁾, the foreign exchange market sees over $2 trillion⁽²⁾ in spot transactions alone (not including derivatives like futures and options). The currency market is much, much bigger than the equity market.
For most retail traders (like you and me), the currency market has many advantages over the stock market, few just a few disadvantages. Let's take a look at them now.
Stock exchanges are only open for about 7.5 hours on weekdays.
The Forex market is open 24 hours a day and doesn't close until the weekend. With three main trading sessions (Tokyo, London and New York), you can be active at any time that suits your schedule.
Brokerage Commissions and Fees
Stock brokers typically:
- Charge much more in commission fees than Forex brokers, and
- Favor big traders over small traders
For example, the minimum stock trade commission might be a flat $20. This means that even if you just want to buy 1 unit of stock, you still have to pay the full $20 fee.
Meanwhile, a currency trade of similar volume would cost around $5, and the commission is scaled accordingly to the size of your trade. If you wish to trade a smaller lot size, the commission fee would be proportionately reduced.
What's more, many Forex brokers now offer commission-free accounts that only charge a spread fee. Depending on your trading approach, this may allow you to eliminate a large portion of your trading expenses.
Perhaps the biggest benefit of Forex over stocks is the amount of financial leverage you can get on your account.
With most equities or securities brokers, the highest leverage you can get is 2:1 or 3:1. With stock CFDs you may be able to get up to 20:1.
With a Forex broker however, you can typically get leverage of up to 100:1, or even 500:1 in some countries. The more leverage you have access to, the more options you have. (See: Leverage explained)
To be an effective stock trader you'll likely need to work with a $25,000 account or larger. This is because of higher margin requirement, at 100% or 50% of the notional trade volume.
As a foreign exchange trader, you can get the same buying power with just $5,000 of capital, as the margin requirement is 5% or often even less. This means that it is much cheaper to get started, and mistakes are less costly when practising on a live account, which is advantageous for beginners.