Forex, or foreign exchange, trading is modestep another day uk forex international market for buying and selling currencies. It is similar to the stock exchange, where you trade shares of a company.
Like the stock market, you don’t need to take possession of the currency to trade. You sell your currency to buy another one. Every traveler who has gotten foreign currency has done forex trading. For example, when you go on vacation to Europe, you exchange dollars for euros at the going rate. The most familiar type of forex trading is spot trading. It’s a simple purchase of one currency using another currency.
You usually receive the foreign currency immediately. It’s similar to exchanging currency for a trip. It’s a contract between the trader and the market maker, or dealer. The trader buys a particular currency at the buy price from the market maker and sells a different currency at the selling price.
The buy price is somewhat higher than the selling price. You paid this spread without realizing it when you exchanged your dollars for euros. You would notice it if you made the transaction, canceled your trip and then tried to exchange the euros back to dollars right away. You wouldn’t get the same amount of dollars back. The largest component of currency trades is foreign exchange swaps. Two parties agree to borrow currencies from each other at the spot rate.
They agree to swap back on a certain date at the future rate. It’s like a spot trade, except the exchange occurs in the future. You pay a small fee to guarantee that you will receive an agreed-upon rate at some point in the future. A forward trade hedges you from currency risk. A short sale is a type of forward trade in which you sell the foreign currency first. You do this by borrowing it from the dealer.
It has the same pros and cons as short-selling stocks. Foreign exchange options give you the right to buy a foreign currency at an agreed-upon date and price. This figure is on a net-net basis. It excludes the duplicate book entries that occur when currency is traded between countries. That’s a result of a slowdown in the spot trading market.
9 trillion traded in forex per day. Forex trading kept growing right through the 2008 financial crisis. 934 trillion was traded per day. The euro is next at 31 percent. That’s down from 39 percent in April 2010. The chart below from the BIS shows the top 10 currencies and the percent of global currency trades in 2016. It is a source of revenue for these banks that saw their profits decline after the subprime mortgage crisis.