One of the most important aspects to consider when thinking in terms of Forex compared to Stock Exchange is how vulnerable each is to liquidity risks.
Liquidity is simply the amount that can be bought or sold without effecting its price. The stock market suffers from a low level of liquidity because any large transactions buying or selling shares can have a major effect on its market price.
Because of the lower trade volume, investors in the stock markets are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.
Say, for example, you want to sell 100 shares of Best Company Ever at USD 32.00 per share. You, or your broker, need to find someone to buy your shares at that price. That is liquidity.
Low liquidity can wreak havoc on equities markets.
Let’s say now that a trader was to sell 400,000 shares of Best Company Ever at USD 30.00, equals $1.2 million. This single transaction would make roughly 1% of the markets volume in one of the major stock exchanges.
When that order is put through the system, the market is now flooded with Best Company Ever stock.
Even if the stock is attractive and buyers are willing, its value may still plummet if there is not enough liquidity.
The FX market, on the other hand, is less prone to huge whipsaws from large buy/sell orders because of the enormous amount of buyers and sellers readily available.
Another very interesting advantage of Forex vs stocks is the possibility to short sell without an uptick. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or which way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market.
Add to that another two very important issues: the stock market is very susceptible to large fund buying and selling and analysts and brokerage firms are less likely to influence Forex market.
What does this mean?
First of all we know what happens when certain big players have an interest in keeping the value of a certain stock up or down irrespective of the company’s performance or market trends. This is very unlikely to happen in the Forex market because of the abounding liquidity.
And last, but certainly not least, analysts and brokerage firms can (and will) influence how the public perceives one company versus another because they benefit directly from this.
It is an all but impossible job to try to deceive the public about a whole country and its currency. Civil unrest or natural disasters spell troubles, no matter what analysts have to say about it.