What are Currency?
The currency market is decentralized international market for buying and selling currencies. It is the largest financial market in the world, and is also known as change of foreign exchange, Forex or Fx.
The foreign exchange market helps companies and individual investor to convert a currency into another. At the most basic level, everyone takes part in it when we travel abroad and sell our local currency for cash currency we need to spend abroad.
In addition to be operated by persons and companies, currencies are important for financial institutions, central banks and Governments. It facilitates negotiations and international investment by allowing companies to earn money in a currency to pay for goods and services in another.
Why trade currency?
Operations with currency allows you to speculate on the relative strength of one currency against another.
The currency is the most popular market in the world, with a vast volume of daily operations. Most of these operations are carried out intra-day.
It is estimated a daily turnover of more than $ 4 trillion in transactions of currencies around the world. Commercial and financial transactions represent only 10% of this business.
The large number of stock market operators, and the huge amount of foreign exchange which operates daily, provide an exceptionally high liquidity. It is a very simple market so can access anyone, usually can buy a currency on demand, because other stock market operator elsewhere will want to sell it, or vice versa.
The currency markets are also free of systems of commissions that may complicate some other markets.
In general, to start only you need a small deposit, and operating costs are low. You can perform operations 24 hours a day and take advantage of high levels of leverage.
How does a Forex operation?
Currency prices are called in pairs, because each operation is purchased one and sold the other.
Each of the currencies in the pair are named with a three letter code, such as GBP/USD (British pound against the U.S. dollar) or USD/JPY (the U.S. dollar against the Japanese yen).
The first currency listed in a couple is known as base currency or main currency. The second currency in a currency pair is known as quoted or counter currency.
The price indicates what amount of quoted currency is purchased with a unit of base currency. For example: GBP/USD = 1,63792, means that a pound is worth 1,63792 dollars. To buy a pound, it would have to sell 1,63792 dollars. If you sell a pound would receive 1,63792 dollars.
Example of currency
Let’s assume that you have read a story that leads you to believe that Sterling should go up against the dollar. Our quote for the GBP/USD cross is 1,6228/1,6230 and you decide to buy 1 contract to 1,6230. A contract is equivalent to 100,000 pounds or what is the same, at the current exchange rate would be $162.300. This means that each point, or fourth decimal in this case, has a value of $10 (in other words, a point is 0.001 dollars per pound and for its position of £100,000, this means that a point is 0.0001$ / £ x £ 100,000 = $ 10)
There is no Commission to pay, since the entire Commission for our CFDs on currencies is included in the spread. While your position remains open, your account will be reflected daily variation of the overnight between the pound and the dollar interest rate (in other words, replicates the charge or the credit of the Tom Next procedure, according to the interbank market, more a small fee of not more than 0,0008%).
Two days later the price of GBP/USD is 1,6355/1,6357 and you decide to take profits. He sold his contract to the sales price that is 1,6355 to close your position.
Your benefit is calculated in the following way:
Closing level: 1,6355
Level of opening: 1,6230
Difference: 125 points
His £ 100,000 contract is $ 10 per point, equivalent to a benefit of $ 125 x 10 = $ 1,250.
(To calculate your total benefit, also must be in mind the daily interest adjustments)
Long and short positions
Depending on whether you believe that the market will go up or go down, can buy (long position) or sell (short position) in the currency market.
Suppose that you have been watching the euro and believes it will go up in price. In this situation, you could open a long position in EUR/USD, i.e. buy euros and sell dollars.
If you believe that the Euro is intended to depreciate, it could open a short position in EUR/USD. This would mean sell euros and buy dollars.
The movement of the currency is measured in terms of points. A point is usually the fourth decimal. For example for EUR/USD, a movement of 1,43551 to 1,43561 is a point.
A currency quote will always be accompanied by two prices: a (bid) sale price and a purchase (offer) price. The difference between the two prices is the spread and the fork that the supplier charges.
The bid price is the price at which you can sell one unit of the base currency.
The offer price is the price you pay to buy one unit of the base currency.
Look at the quote for EUR/USD to the right.
The bid price is the amount that would be in $ (1,27879) in Exchange for the sale of each euro. This is the maximum that the agent would be willing to pay for the euros in Exchange for the sale of US dollars.
The price offer of 1,27887 dollars is the US dollar amount that would pay to buy each euro.