Though forex is the biggest financial marketplace in the world, it is comparatively unknown terrain to retail traders. Until the internet became popular few years ago, FX was chiefly the area of big financial organizations, MNC’s and hedge funds. But with changing times individual investors are more knowledgeable in this relatively grey area. Read on to find the most asked questions on foreign exchange.
How is currency trading different from other trading options?
This option is very different form trading in stocks, futures and options, commodity trading etc. As far as FX trading is concerned there is no central governing body or no clearing houses. There are no rules and regulation laid down by any central bank etc.
It would come as a surprise to all knowing that a market where daily $2 trillion of trade takes places it yet remains highly unregulated. There are no rules are there are in stocks. If you get insider information that the U.S. is going to increase the interest rates, you can go ahead and buy as much dollar as you can. No one will question you or even prosecute you. The fact is that there is nothing such as insider trading on foreign exchange. Nowadays many economic data figures are leaked much in advance than when they are officially released, thus helping in making money of the currency fluctuations.
Are you actually buying and selling something in foreign exchange?
Well, a big nothing! This is a purely speculative market. There are no physical movements of currencies. All deals exist just as entries in the computer and a\vary depending on the market demand and supply variations. All profits and losses are calculated in dollars and are credited or debited to the trader’s account.
The main reason why foreign exchange is there in the first place is that, it aids in trade and export of goods between various countries. E.g. buying and selling of goods produced in one country to another for MNCs. But in today’s world this institutes to only a meager 20% of the total transaction. The remaining 80% is purely speculation. This is triggered by huge Hedge funds, large financial institutions or even retail traders who want to make a quick buck.
Though retail traders trade in all sorts of currencies such as INR (Indian Rupee) or the Thai baht, the majorly traded currencies I the world are as below:
- EUR/USD (euro/dollar)
- USD/JPY (dollar/Japanese yen)
- GBP/USD (British pound/dollar)
- USD/CHF (dollar/Swiss franc)