Investing is associated with wealth building and the concept of making your money ‘work’ for you. Often, when first-time traders begin researching ways to invest online, they encounter the foreign exchange market or the forex market.
To gain perspective, investors tend to break down the pros and cons of various investment markets (forex, stock, futures, indices, etc.) and add those attributes to the trading equation of whether that particular financial market, style of trading and learning curve seems feasible and worth the effort.
That is what we bring to you today, an in-depth comparison guide as to how the forex markets size up to other financial markets, their core attributes, along with critical market and trading insights that are need-to-know. So, with these facts in mind, let’s begin.
Forex vs Stocks
The forex market is most commonly compared to the stock market because, well, just about everyone has heard of the stock market regardless of their education level. While both financial markets present unique trading opportunities, each has its perks that make them more beneficial to specific types of traders.
Core Differences
1. Liquidity - The foreign exchange market dwarfs every other financial market in volume. Liquidity is often associated with volume, and given how the forex market is the largest by volume (over $6 trillion turnover per day) compared to the all world’s stock markets combined ($200 billion turnover per day), the foreign exchange market has far more liquidity than the stock market. Increased liquidity also equates to lower spreads, decreasing your transaction costs, although for the most competitive spreads, stick with major forex currency pairs.
2. Volume - The foreign exchange market is more than 25 times larger in daily turnover than all the world’s stock markets combined. Higher volume allows for traders to enter and exit trades more smoothly while gaining access to better rates from increased liquidity.
3. Accessibility - The forex market is tradable from 5 pm EST Sunday to 4 pm EST Friday. It does not transact like a traditional exchange with an overseeing entity and is open 24 hours a day, supporting worldwide business hours. Compared to stock market trading, foreign exchange hours have more hours of operation.
4. Market Emphasis - For stock investing, there are thousands of assets to choose from in forex, while there are many assets, only eight currency pairs (the major and commodity currency pairs) that make up the bulk of all forex transactions. If you are seeking market diversity to hedge other investments, forex trading can serve that purpose, or you can gain increased market selection with stock trading.
Trading fees were once a defining difference between forex and stock trading, with stock trading notorious for commission fees. However, stock trading is now free (while having fewer fees than forex trading) and available with mobile trading platforms such as Robinhood, TD Ameritrade and ETrade.
How Forex Trading Compares to Stock Investing
| Trading Style | Pros | Cons | Forex vs Stocks |
| Short-Term | Increased volatility. | Undeveloped strategies can result in heavy financial losses quickly. | Optimal for forex traders as tight spreads result in fewer transaction costs while increased volatility is strategy friendly. |
| Medium-Term | Less initial capital is required to benefit from more progressed market movements. | Traders should be well-versed in technical analysis to optimize trade opportunities. | Equally ideal for both forex and stock traders. |
| Long-Term | Increased market volatility can present hidden trade opportunities. | To adequately cover trade positions, traders may need to trade with leverage or deposit more capital. | The foreign exchange market high volatility makes stock monitoring more suitable for long-term traders. |
For traders new to forex, our 'Mastering the Forex Market Guide' is free and serves as the educational pillars leading this publication.
Forex vs CFDs
While both the foreign exchange and contracts-for-difference markets are supply and demand market models, a CFD agreement is a derivative contract whose value is strongly driven by market demand. However, foreign exchange rates are tied to fundamental and economic factors, such as interest rates, unemployment rates, GDP and global affairs.
Core Differences
1. User-Friendliness - The contracts-for-difference market is more difficult to trade as prices are driven more from variable swings of supply and demand and are formulated as derivatives as opposed to real rates such as forex trading.
2. Turnover & Liquidity - The forex market is significantly larger than the contracts-for-difference market. However, many CFD platforms have merged with forex trading companies to offer more comprehensive trade options. Liquidity is also far higher with forex trading, which makes trade entry and exiting trades easier.
3. Versatility - CFDs provide traders with much more market diversity and investable assets than what is supported for forex trading. CFDs can be derived from trade options, including stocks, commodities, indices and futures.
How Forex Trading Compares to CFD Trading
| Trading Style | Pros | Cons | Forex vs CFDs |
| Short-Term | More momentum, higher liquidity, and improved trade feasibility. | Traders cannot benefit from volatile non-currency pair market movements. | Forex trading may present more competitive trading rates than CFDs due to increased market liquidity. |
| Medium-Term | The high market volume creates more fully developed market trends. | Hedging investments can be more difficult with limited investment options. | Both the forex and CFD markets are structurally beneficial to medium-term investors. |
| Long-Term | More accurate and competitive price quoting and fewer trade fees with trading bulk. | Traders may receive a margin call to cover leveraged trading positions. | Forex trading has more competitive spreads and is easier to enter and exit the market at the cost of less trade diversity. |
Forex vs Futures
Forex trading involves the buying and simultaneous selling of a currency pair and is not bound by expiration dates. When trading futures, while there are no minimum trading amounts required, they are bound to a fixed date as a contract to buy or sell a commodity. Similar to experienced forex traders, once investors become proficient in trading futures, similar to forex traders, they tend to focus primarily on one or a few assets to trade.
Core Differences
1. Liquidity - The futures market is minuscule when compared to the size of the forex market. Compared to over $6 trillion in daily fx turnover, the futures market generates an average trade turnover of $30 billion per day.
2. Market Accessibility - The futures market possesses less trade availability with trade halting between 3:15 pm to 3:30 pm and again for maintenance from 4 pm to 5 pm Monday through Thursday.
3. Price Quoting - Generally, the futures market possesses less competitive spreads than the foreign exchange industry (likely due to low volume and minimum liquidity). In contrast, price quotes are not final (prone to market fluctuations) as they are in forex.
How Forex Trading Compares to Futures Trading
| Trading Style | Pros | Cons | Forex vs Futures |
| Short-Term | Greater liquidity and tighter spreads. | More time consuming than future trading. | Futures trading is not as suitable for short-term investors as contracts expire on a scheduled date. |
| Medium-Term | Fewer transaction fees than most futures contracts. | Traders may need more technical charting knowledge to gauge market swings. | The fx markets high volume and fair price spreads are best suited for medium-term traders. |
| Long-Term | No trade limits impair forex traders due to its decentralized market. | May require margin or more capital to adequately cover the trade position. | Suitable for both fx and futures trading, although future long-term trading may require less market knowledge to trade effectively. |
Forex vs Indices
Trading indices vary considerably from forex trading. For starters, there are three types of indices available to trade, including stock, bond and commodity index. Lastly, an index measures the collective performance of an assortment of financial securities, such as stocks.
Core Differences
1. Prediction Consensus - An index is leveraged as a financial instrument and sheds performance insight regarding specific financial markets, whereas forex trading concerns the conversion of one country’s currency for another. Think of index trading more as trading a selective industry as opposed to a singular asset.
2. Volume - The forex market is significantly larger and has far higher liquidity than indices.
3. Market Decentralization - Index trading occurs over centralized exchanges, while forex trading occurs over a decentralized market, not bound or overseen by a central authority.
How Forex Trading Compares to Indices Trading
| Trading Style | Pros | Cons | Forex vs Indices |
| Short-Term | Higher liquidity, less trading fees, and far more market volume. | It can be more challenging to predict accurately. | Greater market liquidity and the ability to enter and exit trades. |
| Medium-Term | Tighter spreads are resulting from increased competition and large market volume. | Traders may need to invest in margin or deposit funds to cover swinging forex market movements. | Index and forex trading are suitable although trading forex will result in fewer transaction fees and increased market competition. |
| Long-Term | Forex positions are not limited, like with a centralized indices market. | Can present more volatility than frequently traded indices like the DJIA, FTSE100 and S&P 500. | Index trading is great for value investors who are in it for the long-haul. The same goes for forex traders although more market knowledge may be required. |
Why Traders Gravitate Towards Forex
Many day traders prefer forex trading for the inherent characteristics that the foreign exchange market brings, such as high liquidity, cheaper spreads from increased competition, flexible market accessibility and trade feasibility. Compared to other styles of trading, investing in forex is suitable for short, medium and long-term investors, while the forex market is by far the most actively participated market worldwide. All-in-all, day traders are hard-pressed to find a trading avenue as advantageous as forex trading.
