The foreign exchange market might seem very similar to other financial markets to some people. On the surface, the forex exchange has many similarities to the stock exchange. However, there are a number of differences. Below is a breakdown of some of the major differences that might not be obvious to everyone.
The stock market is a centralized market, meaning that it is located mainly in one place: the New York Stock Exchange (NYSE). All trades enter and exit from that location. Forex is not centralized, and is considered an over-the-counter (or OTC) exchange.
The stock market is operated on a strict schedule. So is the forex market. However, the stock market operates for 8 hours per day and then shuts down. Traders have to wait until the next morning to start trading again. There is no downtime in the forex market. It’s operated 24 hours a day in 3 shifts, 365 days a year. The forex trading hours in the U.S., Asian and European markets overlap, so trading at any time of the day or night is seamless.
Since the forex market isn’t centralized, a trader can buy or sell directly by spot trading. The stock market always has a middleman, and that means more fees. Every time a stock is bought or sold, there is a broker or other entity standing between buyer and seller making money for just being there. Of course, forex brokers exist, but the spreads are transparent and most brokers don’t charge a commission or tack on additional transaction fees.
Although there is a good deal of formulation and study to forex market analysis, it really boils down to following just 4 major currency pairs, compared to trying to follow any number of over 8,000 stocks in the stock market. Traders also make use of forex systems to help determine the best time to buy or sell a given currency, simplifying the trading process.
Under normal market conditions, forex trades are instantaneous, thanks to programs that automatically execute on a forex trading signal. There is little chance of missing a trade because of execution time. In the stock market, your order is passed to the trading floor, where it can take several minutes to make the trade.