Basic Facts Of Foreign Exchange

Currency exchange is the name given to the foreign exchange market. This market exchanges currency between countries allowing companies in one country to pay for products and services in another. This facilitates global trade and investments. If you are traveling to Europe, you go to your bank and exchange greenbacks for Euro dollars so that you have money to spend on your trip. Your bank bundles this exchange with others and then exchanges the bucks for Euros through currency exchange.

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

The majority of the traders are central and world banks, and international business firms.

In contrast, about 80% of the trading is done by the ten most active traders, which are huge 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 invesment banks, big multi-national corporations and large hedge funds.

The market is split into tiers, with the 10 traders who do the most trading in the top tier. These are the huge international banks. The profit margins here are miniscule and the rate between the bid and ask costs are available only to this elite group. This accounts for approximately 53% of the trade volume. The following tier of investors includes large hedge funds, investment banks and global corporations.

There\’s no fixed exchange rate on currency exchange and it is feasible to get several different rates depending on what huge trader is trading. Rates also fluctuate based mostly on macroeconomic conditions and other considerations. Political conditions can have an extreme effect on rates of exchange.

Foreign exchange is a hopeful market. Although it might be less risky 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 mostly for 3 months, and the spot exchange which is similar to a futures contract, but is routinely a two day exchange. The forward contract boundaries risk somewhat, because money doesn\’t change hands till a fixed upon date in the future. One type of forward contract involves a swap, where two parties exchange currencies for an agreed upon time period. The currency exchange option gives the holder the right, but not the requirement to exchange one currency for another an at a formerly agreed on rate of exchange on a pre set date. The option is equivalent to a stock option.

The foreign exchange market is intensely complex and with much less regulation than the exchange, more subject to abuses. It\’s advantages are its liquidity and the incontrovertible fact that it trades twenty four hours per day. This is a reasonably speculative investment and is going to be approached with caution by small investors. Before considering an investment in foreign exchange, you\’ll need to learn about the market and the best investment methods.