One of the biggest reasons some traders prefer the Forex to the stock market is Forex leverage. Below, let’s compare the differences between stock trading and Forex trading.
Leverage
You will usually transact in stock trading with a fixed leverage of 2:1. Once you can do so, there are still other certification criteria. Not every investor has a margin account funded, which is what you need to capitalize in the stock market.
Forex trading is very different. To qualify to trade with leverage, you open a Forex trading account. There are no qualifying requirements. In the United States, you’re limited to 50:1 leverage, but in other countries, you can leverage as much as 200:1.
Liquidity Differences
When you trade stocks, you buy shares of companies that cost anywhere from a few dollars to hundreds of dollars. Market price varies with supply and demand. Trading on the Forex is a different world. Although the supply of a country’s currency can fluctuate, there is always a large amount of currency available to trade. In consequence, all major world currencies are highly liquid.
Price Sensitivity to Trade Activity
All economies have a somewhat different price-sensitivity to trade. Share purchase of 10,000 shares may have an effect on the stock price, particularly for smaller companies with less outstanding shares than, for example, giants like Apple.
In strong comparison, Forex trading in a global currency of several hundred million dollars would most likely have little – if no – effect on the consumer price of the currency.
No Bear Markets in Forex Trading
You may make money by shorting when a stock market falls, but this entails additional risks, one of which is that (at least in theory) you will have infinite losses. That is unlikely to happen, in fact.
At some point, your broker will end the short position. Nevertheless, most financial advisors caution against shorting for all, and many of the most experienced investors execute parallel stop-loss and limit orders to contain this risk.
In Forex trading you can go short as quickly as you can go long on a currency pair. Different threats apply to the two positions. No additional precautionary trades are required to reduce damages.
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