Of the different types of securities that can be used for trading, two of the most popular are trading in the equities markets and the forex market. Equities trading is the buying and selling of stocks. Forex is the term use for the trading based on the relative value of different currencies. These two market types have signficantly different features. Trading Forex may not be as well known as the stock market, but there exists a wide range of free trading material from which to learn either market.
What Is Traded?
Stock market trading -- equities -- involves the buying and selling of individual stocks or exchange traded funds -- ETFs. There are thousands of stocks and about 1,000 ETFs available for trading. Trading profits can be earned by buying stocks that go up in value or short-selling stocks which go down. Forex trading is taking positions on the relative value between two currencies. There are seven major currencies: the U.S. dollar, Canadian dollar, Japanese yen, Great Britain pound, Australian dollar, Swiss franc and European Union euro, which can be matched up into pairs and traded. Trading profits are earned if a trader selects the correct direction of the change in relative value between two currencies.
Brokers and Exchanges
Equities are traded in exchanges such as the New York Stock Exchange or NASDAQ stock exchange. Exchange trading is an open system where all participants can see buy and sell prices. A stock broker handles a trader's orders by executing those orders into the appropriate exchange for the stock traded. In forex trading there is no central exchange. Brokers act as the middleman between buyers and sellers and a forex broker can also take the other side of a customer's trade. Pricing for forex trades are the prices an individual broker offers to its customers and pricing may be different from broker to broker.
For equities trading, the typical cost is a flat commission to buy and sell shares. Most brokers charge a commission in the range of $5 to $10, making the cost of a round trip trade $10 to $20. Forex brokers typically do not charge commissions, but instead take a spread between the buy and sell prices quoted for a currency pair. A forex spread is quoted in percentage-in-points -- pips. For most currency pairs, a pip is the fourth place to the right of the decimal point. For example, for currencies quoted in terms of the U.S. dollar, one pip is 1/100th of a cent. Broker spreads range from 2.5 to 5 pips, which works out to $25 to $50 for the standard currency lot size. In forex trading the larger the trade size, the larger the spread costs. With equities trading, the brokerage commission is the same, no matter the size of the trade.
Leverage and Trading Account Capital
Equities are also traded through a brokerage margin account. Margin trading allows a trader to leverage his capital and trade larger amounts of stock. If a trader holds stocks for longer than one day, margin trading allows up to two times leverage and the minimum account balance is $2,000. Day trading stock rules allow up to four times leverage and the minimum required account balance is $25,000. Forex rules for U.S. traders allow a broker to offer up to 50-to-1 leverage. This means to trade the standard $100,000 lot, a trader must put up $2,000. Many forex brokers allow the trading of 1/10-size mini-lots, so a trader would need $200 to trade one mini lot. A trader in either market should maintain an account balance larger than the require minimums so that a losing trade does completely stop a trader's ability to trade.
- Trading Markets: How Forex and Stock Trading Differ
- The Complete Guide to Day Trading by Markus Heitkoetter; 2008; pages 51 to 64
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.