With a daily turnover of around $5 trillion, Forex is the largest financial market in the world. It trades the entire US GDP in a few days! By size, it dwarfs all other markets, such as the stock or bond market. In this article, we’ll cover some further advantages of Forex trading compared to the stock market, and you’ll soon realize why Forex attracts more and more traders every day.
Some of them are also highlighted in this video:
You Can Trade Currencies Around the Clock
Unlike the stock market which follows the open hours of a stock exchange, the Forex market is open around the clock – 24 hours a day, 5 days a week
As an over-the-counter (OTC) market, there’s no centralized exchange that trades currencies. Instead, currency dealers and other large market participants located in major financial centers around the world trade currencies independently. Wherever you’re located, there is always an open market somewhere in the world where you can buy and sell currencies.
The major trading sessions in Forex include New York, London, Sydney and Tokyo, spanning over different time-zones and allowing you to open new trades in the middle of the night. If you’re located in New York, you can start trading the Sydney session even on Sunday as Australia is just waking up for a new trading week. Note that during the New York and London overlap, the large number of market participants and their positions can create significant volatility and great trading opportunities. This is a huge plus of Forex vs the stock exchange.
There’s No Middleman in Forex
Another advantage of over-the-counter markets is the absence of middlemen. While you can’t access a stock exchange without a middleman, there is no need for a third-party in Forex. Market participants trade currencies among themselves, at the current market rates which are determined by the supply and demand for a currency.
The absence of middlemen also reduces the transaction costs in the Forex market, which is another major reason why Forex is better than stocks.
Forex Has Low Transaction Costs
As mentioned above, Forex traders don’t need middlemen to trade on currencies, but this is just one of the reasons for lower transaction costs in Forex.
The main transaction cost in Forex trading occurs when opening a trade. Brokers will charge you a small fee based on the spread, i.e. the difference between the buying and selling price of currency pair. However, the large competition between Forex brokers has significantly reduced their spreads, which in the case of the most-traded currency pairs can be as low as 1 pip! To put this into perspective, you would likely pay around $10 to open a position size of $100,000 on the EUR/USD pair, which is the most traded currency pair in the Forex market.
In fact, the Forex market features something called the “rollover”, which debits or credits your account depending on the current market interest rates. If you buy a high-yielding currency and sell a low-yielding currency, you’ll actually make a certain profit from the interest rate differential independent from the exchange rate moves.
Compare this to your usual transaction costs when trading stocks, and you’ll notice the difference. Our battle of shares vs Forex leads to another point for Forex.
Insider Trading Is Almost Non-Existent
Being a multi-trillion-dollar market, it’s almost impossible to influence exchange rates to a noticeable extent. Even large market participants, such as hedge funds and investment banks, would have a hard time to impact exchange rates with their positions worth billions of dollars.
The large difference between the Forex vs stock market size also deepens the liquidity, which means there are many potential buyers and sellers at any given price-level. As a result, even large market orders won’t impact the current exchange rate. The Forex market is highly efficient and shows no noticeable insider trading or market manipulation, whereas those practices often happen in the stock market.
Dozens of Currency Pairs vs. Thousands of Stocks
There are only eight major currencies in the Forex market. Those are the US dollar, euro, British pound, Swiss franc, Japanese yen, Canadian dollar, Australian dollar and New Zealand dollar. Even if we expand this list with the Norwegian and Swedish krona to cover all G10 currencies, there is still a much lower number of currencies compared to the thousands of stocks on the New York Stock Exchange.
The interesting part here is that those currencies are combined into currency pairs, which means that the Forex market hosts dozens of currency pairs consisting of just a few currencies! By only following a small number of currencies and their related news, you can trade on a large number of currency pairs. This means that you don’t have to spend days in analyzing hundreds of stocks – simply focus on a few currencies and you’re ready to explore many trading opportunities in the Forex market.
In this article, we covered the main reasons why you should trade Forex instead of stocks, so you can make your own conclusion about which is better. It’s hard not to realize how these advantages can impact your bottom line in a positive sense. Forex traders can trade currencies literally 24 hours a day, and the low transaction costs won’t eat into their profits as much as with stock trading. Furthermore, the sheer number of market participants makes it almost impossible to influence exchange rates to a large extent, and the deep liquidity of the market ensures that all your trades are opened almost instantly and at the quoted price.
There’s also a much smaller number of currencies compared to thousands of stocks in the stock market. This makes it easier to focus on analyzing the market and finding profitable trade opportunities instead of filtering out the right stocks to buy.