What is the Difference between Forex and Stocks?

Historically the securities markets have been looked at, at least by the majority of the public, as an investment vehicle. In the last ten years securities have taken on a more speculative nature. This was perhaps due to the downfall of the overall stock market as many security issues experienced extreme volatility because of the "irrational exuberance" displayed in the marketplace. The implied return associated with an "investment" was no longer true. (If indeed it ever was.) Many traders engaged in the "day trader" rush of the late 90's only to realize that from a leverage standpoint it took quite a bit of capital to day trade, and the return while potentially higher than long term investing was not exponential to say the least. After the onset of the "day trader" rush, many traders moved into the Futures stock index markets where they found they could leverage their capital greater and not have their capital tied up when it could be earning interest or making money somewhere else. Like the futures markets spot currency trading is an excellent vehicle for the pattern day trader that desires to leverage his current capital to trade. Spot currency trading provides more options and greater volatility while at the same time stronger trends than currently available in stock futures indexes. Former securities day traders have an excellent home in spot foreign exchange.

A good example is the Globex market. While the Globex market is only closed for a 15 minute period each day, the liquidity available after the open outcry market is closed in Chicago is normally very low. Spreads are wider and the ability to place larger orders is non-existent. Because of this most volume traders are forced into trading the EFP market overnight. The EFP market is the spot market priced in futures pricing. EFP's however come with additional fees, and are not available from an electronic interface. Electronic access, speed, no fees, and unmatched liquidity 24 hours a day makes Spot FX the choice for the currency trader.

No Middlemen
Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument trader will cost the them money. Either in time or in fees. Spot currency trading does away with the middlemen and allows clients to interact directly with the market maker responsible for the pricing on a particular currency pair. Quicker access, cheaper costs.

Buy/Sell programs do not control the market
How many times have you heard that "fund A" was selling "X" or buying "Z"; Rumor had it that the funds were taking profits because of the end of the financial year or because today is "triple witching day", all as an explanation of why this stock is up or the market in general is down or positive on the session. No matter what your broker says the stock market is very susceptible to large fund buying and selling, and it is not uncommon for a fund to "run" a particular issue for a few days. In spot currency trading the liquidity of the market makes the likelihood any one fund or bank to control a particular currency very slim. Banks, Hedge funds, FCM's, governments, retail currency conversion houses, and large net worth individuals are just some of the participates in the spot currency markets the liquidity is unprecedented.

At the mercy of Analysts on TV

Have you watched TV lately? Heard about a certain Telecomm stock and an analyst of a prestigous brokerage firm accused of keeping their recommendations "BUY" when the stock was rapidly declining? It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it. IPO's are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses which need the companies as clients. That catch-22 will never disappear. Foreign exchange, as the prime market, generates billions in revenue for the world's banks is a necessity of the global markets. Analysts in foreign exchange don't drive the deal flow, they analyze.

Forex versus Stocks is continued on the next page, please click here.