There are several reasons why investors should choose foreign exchange (forex) trading over trading stocks. For starters, the forex market is the world's largest market in terms of daily transaction volume, and it's almost the most liquid. This market is highly accessible given that it's open 24 hours a day, and investors interested in trading forex can make use of far more leverage than they could by trading stocks.
The World's Largest Market
Global market participants trade more than US$5 trillion worth of currencies per day, according to the Bank for International Settlements (BIS). Daily trading volume averaged US$5.1 trillion in April 2016, according to BIS's triannual survey, which is considered to be the most thorough poll of its kind.
While this figure of US$5.1 trillion (or roughly US$213 million per hour) may seem high, it's more than 5% below the record US$5.4 trillion reached during April 2013, according to the BIS.
In comparison, consider the following information:
- The New York Stock Exchange's daily trading volume averaged US$38.5 billion during the first five sessions of May 2017
- The Nasdaq's daily trading volume averaged close to US$85 billion during the first four sessions of that same month
While the forex market's daily trading volume exceeds US$5 trillion, the U.S. dollar is responsible for nearly 88% of total trading volume, additional BIS figures reveal. This brings the greenback's daily trading volume to more than US$4 trillion.
One major benefit of having a larger market is that it makes it more difficult for individual traders and institutions to engage in price manipulation, which can cause securities to experience sharp price fluctuations in short time periods.
Because the global forex market is so large, it offers traders significant liquidity, which is the ease with which traders can exchange one asset for another. In this case, the forex market's significant size makes it so traders can enter and exit positions very easily.
In addition to giving traders greater maneuverability, high liquidity can help provide them with lower transaction costs, as financial institutions charge less to set up trades. Highly liquid markets can also help protect traders from price manipulation.
When a market enjoys substantial liquidity, it can more easily handle large increases in trading volume without experiencing significant changes in price, making the market less vulnerable to sharp changes in trading volume aimed at causing price volatility.
One major draw of trading forex is that the currency markets are open 24 hours a day. Investors around the world want to trade currencies. Companies require currency for international trade, and central banks have been making use of foreign exchanges since 1971, when the value of most currencies began to "float."
Fortunately there are intermediaries—including banks, broker-dealers and other financial institutions—located in many different cities to help service this demand. For individual traders, 24-hour access simply means greater options.
Investors will find it far easier to combine this kind of trading with part- or full-time work. For example, if a person works a traditional, full-time job between 9 AM and 5 PM in their time zone, they can trade after they get out of work.
Traders might trade forex instead of stocks because when trading the former, they can obtain far greater leverage. By borrowing money to make trades, investors can potentially enjoy stronger returns.
For example, if a trader has access to 400:1 margin, they can make a £4,000,000 trade with just £10,000 in margin. As a result, they would only need to put 0.25% of the trade down as margin. While taking this approach can provide traders with stronger returns, they must keep in mind that leverage is a double-edged sword and can also greatly amplify losses.
As a result, traders will benefit from consulting a financial adviser or other qualified financial professional before using leverage.
As outlined, there are several reasons why investors should opt for forex trading over stock trading. By trading forex, investors can access a market that is far larger in scope than that of the stock market. Because of its size, the stock market offers greater liquidity, which means that investors may be able to enjoy lower transaction costs and more easily enter and exit trades.
The forex market also offers traders greater flexibility than the stock market. Given that it's open 24 hours a day, investors can more easily combine forex trading with other responsibilities. Finally, the forex market offers greater leverage than the stock market, a factor that can potentially amplify gains as well as losses.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…