Wednesday, 11 March 2020

The Difference Between Forex & Stock

Forex & Stock

Today I'm going to be talking about the stock market and the forex market and the biggest differences between both to help you understand how you should be involved. The first thing that we want to discuss here when it comes to the difference between the markets is the market infrastructure.

Market Infrastructure

The stock market and the forex market have two completely different purposes. But outside of that, the way they are put together is just dramatically different. 

Stock Market

  • Heavily Regulated
  • 1 Central Exchange
  • You can see the flow of buyers and sellers

When we're trying to rationalize the US stock market this market is heavily regulated and it goes through 1 central exchange. The New York City Stock Exchange and there are multiple different exchanges, the "Nasdaq" which is an electronic exchange that doesn't even really have a floor it's all electronic, it's out over in New Jersey, but the purpose of those exchanges are, anytime a trader is executing with one of those assets that structured on that exchange, let's say, Apple for instance, anytime you buy Apple, that buyer has to go through one of those exchanges and it is immediately track. You can literally see the flow of buyers and sellers. 

Forex & Stock

That's really important it's called "market debt" it's called "level 2" you get to see the time of sale and you also get to see the number of participants at any given price level and the size of those participants. You see a lot of traders using that to their advantage massively, it's called "reading the tape" So that is one of the advantages of the stock market, you get to see the actual participation and the Evan flow of capital.

Forex Market

  • OTC - over the counter

When you are looking at the forex market. The forex market doesn't have a central exchange. it's called the OTC (over the counter) there is a multitude of different institutions where you are transacting currency, literally, you are transacting currency from the primary banks, for example, banks like Bank of America, Wells Fargo, Merrill Lynch, Deutsche bank. 

Forex & Stock

You're trading the assets in those banks I mean, the cash they have on hand are the prices that you're receiving and all those prices and all those primary banks are being aggregated into one stream and hopefully, your broker is giving you the best price. So if they're looking at the banks of America price point versus the Deutsche bank price point, hopefully, if you're trying to buy the euro and Deutsches bank pricing you a $1.1540, Bank of America might be pricing you a $1.1544, and you want to potentially buy the market, you're probably want to go with Deutsche bank at a $1.1540.

Again, there is a multitude of different entities where you could be transacting and there isn't one central governing buy, for example, the stock market. The SEC (Securities exchange commission) oversees all trading and all rules and regulations over the US stock market, but who oversees and how regulates the OTC market, the forex market. Nobody, you do have the bank of international settlements though, that's basically the bank of all banks, that bank does help you rationalize the amount of liquidity in the number of market participants with their trine survey and that survey comes out every 3 years and it shows you the market depth, it shows you the market participants that are executing in the market. 

That is the biggest difference there. The forex market is the OTC market not being really regulated by anyone institution outside of the BIS which is honestly very light when it comes to regulation. Then you have the stock market is regulated by the SEC having an exchange where you can see level 2 volume and all these other different things. 

The Market Purpose

  • Stock market - value-driven market
  • Forex market - hedging market

This one is really interesting because I don't think people rationalize this, the equity market is a value-driven market, for example, let's say it's 2001 and we're looking to invest in Amazon after the massive collapse. We can hold that asset for the next 10 to 20 years, we're looking for capital appreciation but really in regards to an investment strategy. 

You can't do that in forex, you don't hold assets in forex for decade and decades, you can have 2 to 3 years long trades and effects, but you have to make sure that you're aligning that with the actual cyclical nature of these economies and a true adage in regards to okay, maybe we think that Australia is going to raise rates over 4 or 5 years relative to the Japanese yen or something like that, then yeah, maybe we can catch some trend in the market for a few years or so. but you're not riding forex trades for decades and decades. 

You have the stock market which is the value-driven market and then you have the forex market which is a hedging market, usually, you're using the forex currencies for currency risk, for example, let's say, I'm Apple and I need to buy some products in Japan, and the Japanese are increasing and decreasing in volume and price relative to the US dollar ridiculously. Well, I can use forex futures to block in a price point for the next 9 months to 3 years, so that way I can hedge and get away from the currency risk. That is one strategy you can use in forex. 


You want to stay in alignment with whether you're in the stock market, how people are rationalizing capital appreciation on that end or whether you're in an forex market, how people are rationalizing on how to take advantage of the different currency moves in speculation happening on a day to day basis.

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