For securities traders, two popular markets are the stock market and the foreign exchange (forex) market. One of the biggest reasons some traders prefer the forex to the stock market is enhanced leverage capabilities. However, others prefer the regulatory safeguards of the stock market.
| Forex Trading | Stock Trading | |
| Leverage Limits | 50:1 or more | 4:1 |
| Liquidity | Much larger supply, liquidity | Supply is variable, liquidity |
| Trade Pairing | Any currency pairs | Depends with exchange location |
| Market Hours | 24 hours a day, 5 days a week | Variable depending on exchange being used |
Leverage Limits
In the U.S stock trading, traders with a margin account may use as much as 2:1 leverage. However, day traders who open and close their positions within a single day and maintain an account balance of more than $25,000 can trade up to 4:1 leverage. There are also some qualifying requirements before you can do this.
Not every investor is approved for a margin account, which is what you need to leverage in the stock market.
Forex trading is very different. To qualify to trade with leverage, you open a forex trading account. There are no qualifying requirements. The exact leverage limit depends on the brokerage, but many traders can expect to access as much as 50:1 leverage.
Liquidity
When you trade stocks, you buy shares of companies that cost anywhere from a few dollars to hundreds of dollars. Market price varies with supply and demand. Trading on the forex market is a different world. Although the supply of a country’s currency can fluctuate, there is always a large amount of currency available to trade. All major world currencies are highly liquid, which means the two markets have very different price sensitivity to trade activity. Stock purchase of 10,000 shares may impact the stock price. This effect is particularly powerful for smaller corporations with fewer shares outstanding, as opposed to giants like Apple or Meta.
In sharp contrast, forex trades of several hundred million dollars in a major currency will most likely have little—or no—impact on the currency’s market price. There is too much supply for any single transaction to have too much of an impact.
Trade Pairing
In currency trading, currencies are always quoted in pairs. Not only do you have to be concerned with the economic health of the country whose currency you are trading, but you also have to consider the economic health of the country against which you are trading. Does one country have more job growth than another, or better GDP, or political prospects?
Forex markets sometimes exhibit greater sensitivity to emerging political and economic situations in other countries. The UK, U.S. or other developed nations’ stock markets are not immune to political events that can cause volatility and increase risk, but markets in these countries are usually less sensitive to geopolitical issues.
Market Hours
Currency markets have greater access than stock markets. Traders can trade stocks nearly 24 hours a day from Monday through Friday, but it isn’t particularly easy to access all those of markets.
Most retail shares investors trade through a U.K. brokerage with one major trading period from 8:00 a.m. to 4:30 p.m. GMT. There is a much smaller “after-hours” trading market, but those hours typically have less liquidity and other issues that make them less popular than regular trading hours.
Forex trading, on the other hand, is much easier to do around the clock, Monday through Friday. There are many forex trading institutions worldwide, and it’s always trading time in one time zone or another.