Traders often find it challenging to determine which markets are the riskiest to trade. Despite their correlation, the forex and stock market are considerably different. To decide which exchange is riskier, it is useful to understand the differences and similarities between the two markets. It’s also important to take into account that a trader’s risk tolerance and other factors like liquidity, volume, and market conditions.
When it comes to choosing a market to trade, traders have to adopt a trading style that will suit them in any market and out of both markets. The forex market tends to have unique characteristics that make it stand out from other markets. Most traders regard it as attractive to trade in because of the potential returns it offers.
Top major differences between stocks and forex trading
Here is a look at how the forex market compares with the stock market.
One significant difference between forex and stocks is the enormous size of the forex market. Statistically, daily forex trades average around $5tn daily, with critical currency pairs like the EUR/USD, AUD/USD, GBP/USD, and USD/JPY. The forex market exceeds the volume of daily stock trades, which average around $200bn per day.
With such a large trading volume, many benefits await in the forex market because traders can get their orders enacted quickly and much closer to their desired price. Also, traders can quickly enter and exit the market because the markets are liable to have gaps, which means more liquidity at price points for the entries and exits.
Image showing price volume in a currency pair on the forex market
Image showing price volume for Ford Motor in the stock market
Typically, markets with a high volume of trades have more liquidity, which then leads to lower transaction costs and tighter spreads. For example, the forex standard pairs have significantly lower transaction costs and spread compared to stocks. Liquidity is one significant advantage the forex market has over the stock market.
In the forex market, trades happen over the counter. In other words, no trade executes over a traditional exchange. It also works through the interbank market. Countries do not restrict trading; instead, they go on all around the world during trading sessions and business hours.
Forex trades have remote access to trade for 24 hours, five days a week, whereas stock indices trade in separate time zones.
Little to no commission
When trading stocks on the S&P 500, traders have to pay for the spread directly through a commission to a broker. In contrast, most forex brokers do not charge their participants commission, creating their margin on the spread instead.
Another factor to note about forex pairs is their transparency; stock indices, on the other hand, are not quite as transparent.
Narrow opportunity vs wide opportunity
In terms of instruments, there are only eight major currencies in the forex market, whereas there are thousands of them in the stock markets. Traders tend to focus more on diverging and converging trends between selected currency pairs, and it's easier to monitor eight currency pairs than thousands of stocks.
Also, traders use the economic calendar as a tool that helps with monitoring currency pairs.
Which market is risker?
The answer to this depends on individual traders and their trading style. There are risks involved in both markets, but each trading style and goal determines the best market to trade. Here’s a list of different types of traders and the markets that suit them.
These are traders who plan to open and close trades within minutes to grab small price movement. This trading style will work best for the forex market because of the low cost of taking positions.
These are traders who plan to hold positions for several days based on technical indicators. This trading style works well in both the forex and stock markets.
These are traders who plan to hold positions for months or years based on fundamental analysis. This particular trading style works best in stock trading because the stock market doesn't vary as much in any direction, unlike the forex market.
The bottom line
Ultimately, trading styles and risk levels are quite important. However, many traders prefer the forex market because of the high leverage forex offers compared to the stock market. Regardless of the market traders choose, they should do their due diligence in following a proven trading plan to minimise potential losses in any market.