Understanding Forex
‘How much does it cost?’ asked a man. ‘Two brownish shells’ was the answer. But those good old times are gone. Nowadays, almost every country uses its own currency. That makes a lot of troubles – necessity of changing money during the foreign trips or calculating the conversion rates. But the advantages of this situation are seen not only by the coin collectors. Also, the multitude of currencies creates a great possibility of increasing profits.
‘Forex’ is a key-word that opens a modern way of making transactions.
What is that? There is an answer hidden in the name. The FOReign EXchange market. These three words cover an enormous tool that lets investors, banks and institutions buy and sell different currencies in an easy way. It simplifies a lot the international trade.
Incessantly changing currencies’ relations make Forex transactions risky and depending on the knowledge and experience. Despite the risk, the game is really worth playing. The profits can be multiplied to extremely high sums because of enormous trading volumes.
Leverage
It wouldn’t be possible without using a leverage (up to 200:1). It means that you do not need to have all the money set in contract. In spite of growing risk, the investor – paying only 5 to 15% of sum - has a chance to earn the profit comparable to this which he would earn investing the full input. For example, using only $500, one can control buying or selling currencies worth up to $100,000. With only 0,5% rate growth, the real profit would be another $500 (0,005 x $100,000) that doubles the income.
Over-the-counter structure
What’s also characteristic for ‘Forex’, its OTC (over-the-counter) structure causes that that the trading center common for all the world doesn’t exist. There are a few important centers, starting with London, then New York, Tokyo, Hong Kong etc. They cooperate, so when the first trading session ends, the next one begins.
Speculation is the world that cannot be avoided while talking about markets. Fortunately, the ‘Forex’ is so large and so liquid that almost all the transactions can be realized immediately. That makes manipulations (even those by the largest banks) ineffective for a longer time and the main trends stay intact.
The whole foreign exchange market’s work depends on currencies and their rates. The most traded currency (December 2007) is United States dollars – almost half of daily share. Next is Euro – nearly one fifth of daily share – and Japanese yen on the third place. Pound sterling placed fourth. Behind them – Swiss franc, Australian dollar, Canadian dollar and Swedish krona.
The risk factor and Demo Accounts
The theory looks great but the high risk may keep inexperienced investors or private traders away from the ‘Forex’. That’s not a problem, now. Most of the platforms letting executing transactions, allow creating Forex demo accounts. These accounts look the same as the real ones but they introduce customer into a foreign exchange market’s world without taking any risk. Client gets a possibility of investing virtual money to personally check the mechanisms of ‘Forex’. Although the safety clause (informing that the real conditions may be a little different, so virtual successes do not guarantee similar successes in real life), it’s also the best way to gain necessary experience and rate own skills. For example, you can try it with the ‘Capital Market Services’, where you get $50,000 virtual cash at the beginning.
The risk is high and only the best prepared managers can be (more or less) sure of the success. But fortunately, ‘Forex’ became easy-accessible for more and more people, demanding not only the specialist knowledge but also a bit of experience and favouring fortune – some factors are unpredictable.
There’s nothing more left to say, but ‘Good luck!’.