Forex Vs Stocks I: What Is Distinct About The Forex Market

This is the primary of two articles looking at forex vs stocks from the point of view of the retail stock trader. Forex has been receiving a lot of exposure recently and has attracted many new traders working from home, as well as many stock traders searching to diversify into currency trading. But what exactly is the forex market? How does it operate?

Global Market

Currency trading is a international affair. You are not limited to dealing in the currency of your own country. Forex is an over-the-counter market and there is no central exchange or clearing house. This gives the forex market a number of advantages over the stock market for a retail trader.

Transparent Market

The price of a stock is affected by the performance of a business whose numbers could be manipulated or known to insiders for some time before it is discovered publicly. Currency prices, on the other hand, are driven by the economic implementation of a total nation. This is roughly unfeasible to manipulate and much more transparent. This means that a trader working from home, out of the loop of privileged financial information, is on a much more level playing field in the forex market than in stocks.

Liquidity

Daily dealings in the currency exchange market total approximately $4 trillion per day. This is more than the total of all of the world's stock exchanges added together. What is more, there are only a limited number of likely currency pairs compared with probably hundreds of thousands of business stocks. With so much money concentrated in such a incomplete arena, price exploitation by the bigger players is much less of a dilemma, if it exists at all.

As you can imagine, such high liquidity also means that it is particularly unlikely that a trade in any of the major currency pairs would have trouble getting matched, even in terrible times. This is a huge advantage, especially if you are trading huge positions.

Development

So if forex trading has so many advantages, why is it that it is not been well-liked until recently? The answer is that the market itself only began for real in the 1970s when swap rates ceased being permanently pegged by the 'gold standard' and were permitted to fluctuate.

Even then, it was only the banks, hedge funds, and major institutions who were concerned in trading on the currency market at first. There was no history of individual investors getting on the telephone to a broker to deal in currency as there was in stocks. This means that it was not until the advance of the internet that the forex market opened up and forex vs stocks became a actual choice for retail traders.

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