Tuesday, December 4, 2012

Know The Basics of Forex Trading Part.II

There are three types of investors in the forex:

The first kind is of International companies, which protect against the variation in the currency that could affect their financial stability.

 I wish to site one example for it: Let us imagine French wine producer exports bottles of wines worth 100 Euros of each to the US retailer. Assume at the time of delivery of the wine 100 Euros are worth 130 US dollars. There for this is the price the US retailer is going to offer for each bottle of wine. At the end of the sale the retailer pays the money in dollars but the producer is in need of Euros. Therefore the dollars has to be converted into Euros. Let us compare if 130$ is equal to 100Euros and 130$ is equal to 80 Euros. For the second one the French producer has made a very bad deal and to safeguard the exporter against this risk, it has to pay a premium and purchase an option contract changes on financial markets. And it gets the right payment at the rate agreed at the time of contract so that the producer will get 100 Euros against 130 $.

 Banks are the second category of investors. They will carry out speculative or hedging.

Using the example above, the bank will cover the French producer by selling an option contract currency and pocket the premium paid. It can therefore gain or lose (if the Euro / Dollar has depreciated, that is to say, if my $ 130 is worth more than 80 Euros for example then the bank will have to pay 20 Euros per bottle producer from its pocket.

 The last one is the individuals who for more than a decade are actively involving in the Forex trading. You can see lot of online sites and brokers offer small investors an opportunity to access this market. To get involved through them you have to invest a minimum amount which is reasonable and a computer with fast internet connection and they provide you online assistance and training to get started.

 Main advantage of this market is its timing. This large amplitude of schedule allows the small investors to carry out their transaction at any time at their convenient even at the odd hours of the night. The Forex trading is easy to monitor since they are generally conducted on few major currencies like Japanese Yen, The US dollars, Swiss franc, The Euro and the British Pounds. However there are few more currencies that can be negotiated. The high liquidity of the market allows a large volume of transactions. The forex can be invested as derivatives as CFD through leverage can lift 400 times of the cash invested by the investor. Be careful with CFD investments because losses may also result from such large leverage which may even exceed your initial deposit. Therefore much care must be taken in this type of investment. Another very important one is the transaction costs. Transaction costs are much lesser than any other markets.