Understanding Forex Trading

Posted on: October 17th, 2012 by Guest Author No Comments

What is Forex Trading?

Forex, also known as the foreign exchange market, is the global trade market focusing on various world currencies. Products and services are bought and sold everywhere around the world, twenty-four hours a day, every day. All transactions that happen across national borders require non-domestic currencies in order to enact payments. The market maintains a rate of exchange between all world currencies in order to make global transactions possible between foreign entities. For example, if a company in the United States wants to purchase computer chips from a company in Japan, the US company would have to make their payment to the Japanese company in Yen. This would require their US dollars to be converted for the transaction. There is also the possibility that the US company could pay in Dollars, which would require the Japanese company to have that money converted on their end of the deal. Either way the basic concept is the conversion of one form of currency to another.

What Makes Forex Trading Different?

Forex Trading is different from other types of trading, such as the stock market in a number of ways, some of which are:

• Time
• Exchanges
• Processing of Transactions
• Costs of Transactions
• Margin Trading

The Forex market is the only one that features twenty-four hour trading, unlike the stock market which only has trade at certain hours. Forex is also different because the market has no exchanges; although there is exchange based forex trading as futures. Other than this exception, all forex trade is done over the counter through the spot market. The largest scale of forex trade is done in the inter-bank market, meaning that banks trade with one another on behalf of their customers. There is no central location for price data, nor is there any way to find out volume information. Since there is no exchange, transaction processing is done directly by brokers, meaning the brokers take the other side of the trade. This direct trade and lack of exchange means that most forex brokers don’t charge commission. Since brokers take the other side of customer trades, they profit by making the spread between the bid and offer prices.

When speaking of margin trading, it should be understood that the forex market is completely margin based. There is no possession of actual currency, but instead there is a theoretical agreement that possession will happen at a later time. This means that customers can benefit from price changes. In order to do this the broker needs a deposit on any trades being done, which provides a guarantee against any losses that might be incurred. The deposit varies depending on the broker, and can be anything from one to two percent in most cases. There are also no margin loans as there are with stock market trading. Forex brokers don’t lend money to buy securities like stock brokers do, so there are no margin interests charged.

Author Bio: Jason Moore is a freelance writer, professional blogger, and social media enthusiast. His blog Creditreport.org focuses on Finance. You can follow him on Google+ .