Such properties of the forex market, as a significant volume of turnover, volatility and global structure contributed to the rise of its popularity among investors. Due to the high liquidity level, investors are able to conduct very large transactions without affecting the exchange rate. Large positions are available for traders because of low marginal requirements in the industry.
Forex – the only market that works really around the clock and at any time has good liquidity. For busy traders, this is the optimal solution. As can be seen from the table, large currency centers are scattered around the world, they are in different time zones. As soon as the market in the US closes, trading starts in Asia, you can trade at any time.
Forex offers investor more opportunities for large earnings, but the risks are much higher than, for example, when trading stocks.
One of the key features of forex is the level of leverage. Due to the high liquidity of forex margin requirements are low, and the leverage is high. In stock markets it is simply impossible to find such low requirements for collateral; for the purchase of shares, it is necessary that the trader’s account has a minimum of 50% of their value, while only 1% is needed to buy the currency.
For example, having on the account of 1 thousand dollars, the trader can control the capital in the size of 100 thousand dollars – the rest of the money is lent by the broker.
The ultra-high level of leverage means that a huge profit in a blink of an eye turns into a killer loss. You can lose all your capital in a few minutes. It is extremely important to understand the beginners, as well as the fact that the currency market – because of the huge amount of money and players – reacts actively to new information, which leads to sharp movements of currency pairs.
The dynamics of currencies lags behind the shares in percentage terms (after bad news, the papers of an individual company may lose a significant part of the cost in just a few minutes), however, it is the leverage that is responsible for the volatility in the foreign exchange market.
For example, with a 100: 1 lever, a trader for every 1,000 dollars receives a capital of 100,000. If he invested it in a certain currency, and it falls in price by 1%, the trader will lose the initially invested one thousand. The loss will be 100%.
In the stock market, most traders do not use leverage, so a loss of 1% does not significantly affect the trading account (if the stock falls by 1%, the losses will be only $10 from the invested thousand).
Despite the risks, it is the size of the leverage that attracts many speculators to the foreign exchange market.
The difference between the currency and stock markets
The main difference between the two markets lies in the number of traded instruments: there are few on the Forex market, while the number of public companies around the world is in the thousands.
Most forex traders prefer seven currency pairs: four major ones (EUR / USD, USD / JPY, GBP / USD, USD / CHF) and three “commodity” ones (USD / CAD, AUD / USD, NZD / USD). All other cross-pairs are simply combinations of the same currencies. This somewhat simplifies the trade: traders do not need to select the best options from thousands of issuers, but enough to monitor the economic and political news of eight countries.
In stock markets, there is often a lull. Volumes are falling, trading activity is decreasing. As a result, it can be difficult to open and close positions at the right time. In addition, not all investors are able to earn a drop in shares.
On the other hand, on forex you can earn both on growth, and on falling, as in each transaction the trader simultaneously sells one and buys another currency. In other words, a short sale is part of every transaction. Due to the high liquidity of the foreign exchange market, there is no need to wait for the price increase before opening a short position (unlike the stock market).
In addition, trading costs in the stock markets are much higher, as traders are forced to pay spread, broker commission and exchange fees. Forex brokers charge only spread for their services.