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Wednesday, August 5, 2009

The Basic Facts Of Currency Exchange

By Jerry Barr

Forex is the name given to the currency market. This market exchanges currency between nations permitting companies in one country to pay for goods and services in another. This helps world trade and investments. If you are traveling to Europe, you go to your bank and exchange dollars for Euro dollars so that you have money to spend on your trip. Your bank bundles this exchange with others and then exchanges the greenbacks for Euro Bucks through forex.

The foreign exchange market has no physical location and is open for business 24 hours a day between Monday morning in New Zealand thru Friday night in Asia. The average trading volume is over 3 trillion dollars a day. Margins are relatively low.

The market trades, typically over three trillion dollars a day. Margins are small, but that isn't an issue when trading in amounts this large.

By contrast, about eighty percent of the trading is done by the ten most active traders, which are massive international banks. These traders make up the top tier of the market. The difference between the bid and ask prices at these levels are extremely narrow and unavailable to the rest of the traders. These top tier traders account for 53% of total trading volume. Below the top tier are smaller investment banks, big multi-national firms and massive hedge funds.

More than seventy percent of the the transactions in this market are speculative. Individual traders can only participate thru currency exchange brokers. Brokers may trade against their clients and take other side trades which could lead to a conflict of interest. The market is moving to regulate brokers to stop this situation. This points out another difference between currency exchange and the stock markets. Stock brokers are exactly controlled and can face criminal penalties for acting against their client's interests.

Lots of the transactions, about 70%, are of a hopeful nature. That is, they are done in the hopes of earning a profit instead of an exchange for practical use. Average financiers can only gain access to this market thru a forex foreign exchange broker. Until fairly recently, their were few limitations on the practices of the brokers. There is an ongoing effort to break down and eliminate brokers who take trades that are in contest with the best interests of their clients.

Foreign exchange is a speculative market. Even though it might be less dangerous than high risk stock trading, as with any investment there is a potential for both gain and loss. When shake ups in the market occur, most traders head for the safest, or most stable currencies, like the Swiss franc. This drives the rate of exchange up on those currencies.

Different types of trading instruments include the futures contract which is usually for three months, and the spot transaction which has similarities to a futures contract, but is normally a 2 day exchange. The forward contract boundaries risk somewhat, because money doesn't change hands till a fixed on date in the future. One type of forward contract involves a swap, where two parties exchange currencies for a fixed upon length of time. The foreign exchange option gives the holder the right, but not the requirement to exchange one currency for another an at a previously agreed upon rate of exchange on a pre set date. The option is analogous to a stock option.

The forex market is extremely complicated and with a lot less regulation than the exchange, more subject to abuses. It's advantages are its liquidity and the fact that it trades twenty 4 hours per day. This is a fairly hopeful investment and may be approached with caution by tiny investors. Before considering an investment in forex, you'll need to study the market and the best investment secrets. - 23208

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