Forex Trading – Being Investment Smart
Trading for the common man means an exchange of one item for another. Our ancestors exchanged goods for food, clothes and the goods required for a living. Then came currency. Now, we trade money for goods, services and even for other foreign currencies. Read on to know more on the largest market in the world - the Foreign exchange market or Forex trading.
Forex trading is an excellent way to invest money if one has the basics right. We are familiar with other markets such as the stock and bond markets. Trading and market are two prominent words here. Trading is the swapping of two equally significant items such as money for goods. A market as one may know is where the trading takes place and bears all the aspects of trading.
Forex trading is the trading on one currency for another. In simple words, Forex trading allows you to trade your currency for a foreign currency, for example, the rupee for the dollar. The rate at which Forex trading takes place depends on the exchange rate at the time of trading. Currency traders are to Forex trading what stockbrokers are to the stock market. They keep a close watch on the fluctuations in the exchange rates of various currencies just like brokers cogitate on stock prices.
In Forex trading the two commodities exchanged are individual currencies and are represented as three-letter codes XXX/YYY. XXX (Base currency) is the currency being traded for and YYY (counter/quote currency) is the foreign currency. The U.S Dollar is usually considered the base currency except in the case of the Euro, GB Pound and Australian Dollar. In such a quote XXX is expressed in terms of the rate for YYY, as in USD/CAD represents the exchange rate of the Canadian Dollar against a dollar.
There is a similarity between trading in gold and Forex trading. The exchange rates vary depending on whether one is buying or selling and is called the bid/offer spread. In Forex trading, one buys from the market and sells to the market. The other term used when the market is buying during Forex trading is ‘bid’. ‘Ask’ and ‘offer’ are terms used when the market is selling currencies. There is usually a small difference between the ‘offer’ and ‘bid’ rates. The difference is usually very small, sometimes just one pip. Forex trading is not an ‘over the top’ (OTC) market, as in, there are multiple channels of trading and not any fixed trading avenue. Forex trading may be done online, over the phone, through fax or through currency traders/brokers.
Forex trading may be done by anyone, however the traders may be categorized as:
Consumers: Consumers indulge in Forex trading when they are in the country whose currency they require. For example, visitors to countries who trade their home currency for the currency of the country they visit in order to buy goods and services.
Businessmen: These are people who perform business transactions with foreign countries. They take part in Forex trading to receive payments for their business dealings such as goods delivered or services provided.
Investors/speculators: This category of people requires foreign currency to take care of investment tools such as real estate, shares and bonds.
Commercial/ Investment/Central banks: Banks are a part of major commercial deals and play an important part in Forex trading.
There are many online websites that provide information to beginners and should gather a basic understanding before embarking on Forex trading.