A quick examination of the structure of the Forex market compared to the structure of the US stock market is likely helpful to newer investors who are looking to determine for themselves how to tell the two apart and why it matters.
The Stock Market Structure
There are much more formalized and centralized structures that govern how the stock market works compared to the Forex market. It is designed in such a way that all trades have to go through a specialist, and that person has some control over the prices that inventors see coming on their screen. The specialist is only interested in making a market, and they don’t always have the best quotes or best prices for their customers. Thus, it is a process that leaves many in the dark and often results in someone getting invested in stock at a price that they don’t find ideal.
The specialists in the stock market must control the order book to maintain an orderly market, and this means that they sometimes need to buy or sell stocks when there is no other buyer or seller on the other side of them. It is a duty that they are legally bound to take care of. The whole process is very centralized, and it is not necessarily the most open for new investors to make as much money as they possibly can. Day traders in the stock market are almost always crushed because of these rules.
Forex Markets Are Decentralized
A beautiful thing about Forex markets is that they don’t have the same centralized structure that you see in the stock market. It is easy to get in or out of trades, and there is not one set price for any currency pair across brokers at any one time. To be fair, the prices are generally quite close to one another, but they are not necessarily identical. This is because there is a multitude of exchanges that the currency market flows through, and it is common to have those different exchanges reflect different prices at any given time. It just makes sense then that the quotes that show up would also be different from one broker to another.
People often like the decentralized approach because it means that they get a more fair and open market. There is less risk that anyone can buy influence that gets them a favorable deal in this market, and the market itself is enormous. There is so much more liquidity in the Forex markets that they dwarf the size of the stock market.
The additional liquidity that one finds in Forex means that there is almost no time at all between when one executes a trade and when it is finalized. There are almost always willing buyers and sellers of a currency at any time of the day or night.
Finally, that brings up one last point worth making about how the Forex market is different in structure from the currency markets, and it is this. The Forex market is open 24 hours a day, 5 and a half days a week. That is a lot more trading action than what you get with the US stock market which is only open from 9:30 am EST to 4:00 pm EST. Those short hours are all the time that traders in the stock market have to try to make their money. Forex traders are not nearly as boxed in, and they can look for opportunities during all hours. This is a lot better system for those who make work unusual hours or who have other constraints on their time.
Overall, you can think of the Forex markets as being a lot more open, transparent, and larger, but the stock market is what still gets much of the public’s attention at this time.
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