Investments in the foreign currency market, also known as “forex,” have a lot in common with investments in stocks. Both forex and stocks are speculative investments, offering higher rates of returns than other assets.
Both forex and stocks are easily accessed through online investment platforms. Both forex and stocks appear in professionally managed portfolios. But there are significant differences between these two common investment vehicles.
Stocks move fast, but forex moves faster
Both stocks and foreign currencies are assets for investments who seek quick returns. There’s no doubt that stocks and forex move faster than, say, commercial real estate. Stock and forex value change constantly throughout the day.
However, forex is a very fast market. Investors may wait months or years for optimal timing of stock sales, but it is rare to hold forex more than a few days. Positions in forex often close just a few hours after they are acquired.
It’s a lot easier to keep up with the forex market than it is to keep up with the stock market
There are, as the name suggests, 500 stocks in the S&P 500. There are 2,800 stocks listed on the New York Stock Exchange. There are 3,300 stocks listed on the NASDAQ. There are thousands more traded over the counter (OTC).
But there are only seven major trading pairs listed on forex. If you can keep up with these seven common trades, you can become a profitable forex investor:
- EUR/USD, euro and US dollar
- USD/JPY, US dollar and Japanese yen
- GBP/USD, British pound sterling and US dollar
- USD/CHF, US dollar and Swiss franc
- USD/CAD, US dollar and Canadian dollar
- USD/AUD, US dollar and Australian dollar
- USD/NZD, US dollar and New Zealand dollar
It’s a lot easier to keep up with seven pairs of currencies than with nearly 10,000 publicly traded companies in the US alone, not even considering foreign markets.
Forex trades 24 hours a day
Stocks trade mainly when the exchanges are open. It’s possible to sign up with brokerages that will do after-hours trading, but by and large stock trades must be conducted between 9:30 am and 4:00 pm New York time Monday through Friday.
Forex trades across American, European, and Asian trading hours, from 5:00 pm Sunday New York Time to 5:00 pm Friday New York time. Investors generally have 24-hour service on their accounts during forex trading hours.
Forex has higher trading volume
The major stock exchanges do trades in the range of several hundred billion dollars per day. The forex market does trades totaling over $5 trillion per day. No investor ever has to worry about being able to find a buyer or seller.
And because the forex market is so large, individual banks or investment funds cannot control currency prices the way individual investment entities sometimes control stock prices. Market manipulation of the forex is minimal. Likewise, analysts have minimal control over the currency market since no currency ever debuts as an IPO.
There is no restriction on short selling on the forex market
Whether the market is going up or down, every forex investor has access to the market. There are always trading opportunities for forex.