Although there are many similarities between trading in the stock market and on the forex market, several differences exist as well.  As the forex market is actually a combination of several forums in which currency is exchanged, there is no one central location to regulate trading and quote prices, unlike most stock markets.  In fact, most times different forex markets will have a different price for a given currency pair.  Although the difference in prices is almost always minute, it can sometimes be confusing to the beginning forex trader.  With the stock market, the market maker for a particular stock sets the price, and that is the only price available to everyone for the equity at that moment.

An additional way in which the experiences differ is that there is no restriction on short selling in the forex market.  In the stock market, there are several restrictions when selling a stock short, namely that a stock can only be sold this way on an uptick.  During a bear market, opportunities like this may be rare, so it is sometimes difficult to capitalize on falling prices.  The forex market has no such restriction, so if the general direction is down for a currency, the opportunity readily exists to ride this trend and quickly take advantage of the situation by shorting the currency.

Another difference between forex and stock market trading is that with the allowed level of margin is usually much greater in a foreign exchange retail account than with an account at a stock brokerage.  Because the price movement of currency is relatively small each day, forex brokerages will often extend a loan of between 10 and 40 times the account balance.  The chances of a currency price going down to zero and being completely devalued is extremely small, especially when dealing with well established currencies such as the U.S. Dollar or the Euro.  If one of these main currencies drops to zero, the brokerage has much bigger things to worry about than losing the contents of a retail currency position.  With a stock account, double the account balance is the norm, as the account holder must have adequate capital to cover any losses in the event the stock drops dramatically.  Stocks can and do become worthless at times, so a stock brokerage must take extra steps to protect itself.

Interest rate changes affect the two types of markets differently.  When a country raises its interest rates, its currency typically rises as well because many speculators rush to make investments in that country to take advantage of the favorable interest rate.  When they invest in that country’s bonds, for example, they must convert their capital into the country’s currency, creating more demand and raising the price.  The country’s stock market normally declines in this situation, however, because rising interest rates make it more expensive for companies to borrow money, which causes their profits to drop.  Lower profits means lower stocks in the long run, so many investors sell out in anticipation of this.  Sometimes, though, a stock market that declines too much will drag its currency down along with it, so in that case rising interest rates will cause both the stock market and the currency to decline.

Finally, due to the many different forex marketplaces all over the world, currency is traded 24 hours a day, while most stock markets are only open during regular business hours.  The active forex trader must keep a close watch at all hours on world affairs when dealing in international currencies, as an important economic news item could be released at 2am Eastern time that can affect currency prices.

The differences between trading currencies and stocks are significant, and require careful consideration before an experienced stock investor ventures out into the forex market.  For those who are able to make the adjustment, trading in the fast-paced world of the foreign exchange market is a rewarding experience.

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3. Forex Trading – Currency Trading vs Stock Investments
4. A Guide to Forex Trading
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