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

By: Josh Baskin

Read More About Currency Trading

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 branch out into currency trading. But what precisely is the forex market? How does it work?

Global Market

Currency trading is a worldwide affair. You are not restricted to dealing in the currency of your own nation. 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 value of a stock is affected by the functioning of a company whose figures could be manipulated or known to insiders for some time before it is exposed publicly. Currency prices, on the other hand, are determined by the economic implementation of a whole nation. This is almost to manipulate and much more transparent. This means that a trader working from home, out of the loop of confidential economic 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 nearly $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 restricted number of likely currency pairs compared with possibly hundreds of thousands of business stocks. With so much money concentrated in such a partial arena, price exploitation by the bigger players is much less of a trouble, 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 most important currency pairs would have trouble getting matched, even in bad times. This is a huge benefit, especially if you are trading big positions.

Development

So if forex trading has so many advantages, why is it that it is not been trendy until recently? The answer is that the market itself only began for real in the 1970s when swap rates stopped being permanently pegged by the 'gold standard' and were allowed 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 buy and sell in currency as there was in stocks. This means that it was not until the development of the internet that the forex market opened up and forex vs stocks became a actual choice for retail traders.

Article Source: http://depositarticles.com/

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