It is common for people to simply relegate the foreign exchange into the category of an investment market. While technically this categorisation is accurate, it is important to note that the forex market is significantly different from other equities markets.
For an individual who is planning to start trading on the foreign exchange, the importance of knowing the difference between the forex market and equities markets cannot be understated. Therefore, if you have just decided to become a member of the ever-growing community of online forex traders, then you should make sure that you know the following differences.
Spreads vs. Commissions
In virtually every equities market, a trader has to pay commission to the broker for the privilege of trading. These commissions vary from broker to broker and market to market and range from a lump sum amount to percentage of trades.
Forex traders that make the foreign exchange accessible to the common man, however, usually do not work through commissions or lump sum amounts. Instead, their income system is based on the concept of spreads i.e. the difference between Bid and Ask prices.
24 Hour Trading
A major difference between the equities market and the foreign exchange is that the forex market never sleeps. The FX market manages to be available 24 hours a day because it shifts from one location to another as the time zones change.
For instance, when the Tokyo market opens the foreign exchange becomes accessible to all the traders throughout the world. Subsequently, when the Tokyo market closes, the global forex market becomes available to traders through the London market.
This way, a trader can trade on the forex market regardless of where he is in the world and irrespective of what time zone he wants to trade in.
All equities markets throughout the world offer leverage to traders. However, the extent to which this leverage can be used varies from one market to another. On the foreign exchange, some forex brokers leverage up to a 500 to 1 ratio. This is significantly more than what brokers on other equities markets offer to their traders.
The extent to which a trader can use leverage in the forex market is one of the reasons why the common man is attracted to it. The reason for this is that the use of leverage allows a trader to increase his purchasing power in the FX market.
This brings forex trading on the foreign exchange within the reach of even those who cannot invest a lot of money. Moreover, this also increases the potential for profits for traders.
When it comes to equities markets, a trader can only benefit when the market is on the up. This is not true in the case of the foreign exchange where a trader can open profitable positions in the market, regardless of which direction the value of the relevant currency is heading.
Trading on the foreign exchange when the currency’s value is appreciating is known as going long, while trading when it is depreciating is called going short.