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How Does The Forex Market Differ From The Other Assets Classes?

How does the forex market differ from the Equity market?

The main differences between Forex and Stock markets are as follows:

Basis Forex Market Equity Market
24 hour market Yes No
Volume and Liquidity Very High Less than Commodities and Forex
Commission No Yes
Exchange No Yes
Margin Trading High Low
Manipulation Difficult Commonplace

1. 24 Hour Market

The major difference between the forex and equity market is that forex market is a non-stop, continuous market which gives full freedom for traders to choose their own time to trade. On the other hand, the stock or equity market opens for about 8 hours a day from Monday to Friday, depending on the exchange in question.

2. Volume and Liquidity

Volume and liquidity are the biggest advantages of the forex market, leading to its substantial popularity among traders. The volume in Forex markets is about 100 times higher than global equity markets. Liquidity plays a crucial role in its popularity, which
helps traders exit trades easily when the market is not favorable.

3. Commission and Transaction cost

Transaction cost and Commission in the forex market is close to nil. This is also another reason that forex is becoming a strong alternative to equity markets, particularly as corporate fraud and crashing markets take their toll on investors. In addition, equity markets involve substantial brokerage and commissions which increase the overall cost of trading.

4. Exchange trading

Forex market is an inter-bank market and most transactions is carried out over the phone or the internet between banks on behalf of their customers. Only Currency futures are traded on the exchange. In the case of equity markets, trading cannot take place in the
absence of an exchange- even in case of the Over-the-Counter (OTC) market.

5. Margin Trading

In forex trading, margin trading is a common norm as currencies are traded based on a margin (initial and maintenance margin). However, in case of equity markets, margins are typically expensive are not commonplace. Cash is the most common form of trading in the spot equity market. In addition, the forex market involves much higher leverage than in the case of equity markets. For instance, forex brokers can provide tremendous leverage of upto 50X or even 100X. Equity markets typically involve much smaller amounts of say 10X.

6. Manipulation and intervention

Manipulation in the stock market is very common, in the form of insider trading, block deals, etc. This adds to the risk of the equity markets across the world. In case of forex, however, manipulation is very difficult as the market is much larger and far more complex.

Equity operators and market makers play their own game by buying and selling blocks of equity to manipulate stock prices. Typically, the only intervention in the forex market is done by government bodies, particularly the central banks, who buy and sell currencies to maintain a certain level of currency valuation.

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