The Long And Short Of Forex
Forex. It used to be just for the big boys. The popularity of
the Internet, however, is making it increasingly popular investment
among small-time but aggressive investors who want a high return
rate on their investments.
But the expectation of big bucks is exactly how an investor gets on
the road to being conned by many scammers; excitement gets in the
way of understanding how the forex market actually works.
The
forex market works very much like the stock market, only that
you're buying and selling currencies. Your profit margin or loss
depends largely on the difference between the forex rate at the BUY
stage and the forex rate at the SELL stage.
When you're trading in forex, you're actually like buying shares in
a country, except that there are no prospects for dividends. Around
US$1.9 trillion are traded daily in forex markets worldwide, with
the US dollar being the most traded currency. The Euro comes in
second and the Japanese Yen, third.
The same law of supply and demand that affects stocks, and other
commodities for that matter, also affects forex; an increase in
demand for the dollar also increases its exchange rate. In general,
forex demand and supply is affected by a combination of (a) a
country's economic factors such as economic policy and economic
growth, (b) political conditions in that country, and (c) market
perception on the country and/or currency.
The big boys that are used to forex trading are large international
banks, commercial companies, central banks, investment management
firms, hedge funds. Small-time forex investors who just invest
several hundred dollars in forex trading are only able to trade
through brokers and banks. (It is precisely because of this
prevailing indirect involvement that individual investors are being
targeted by scammers.)
Within the forex market several financial instruments are used: spot
transaction, forward transaction, futures, currency swap, and
options.
A spot transaction has a turn-around time of two days. This involves
cash transactions of buying and selling currencies. Spot
transactions comprise the largest volume of forex transactions among
forex instruments.
In a forward transaction, the buyer and seller agree to exchange
monies at a future date, at a rate that would prevail over the
prevailing forex rate on the specified date. A futures instrument is
a forward transaction with set contract sizes and maturity dates;
$500,000 at an agreed forex rate in January 2008, for example.
Futures are traded on the futures market exchange.
In currency swap, parties agree to exchange currencies for a certain
time period and reverse the process at a future date.
Options, meanwhile, allow an investor to exchange on currency into
another currency at a pre-agreed exchange rate on an agreed-upon
date.
Knowing about these instruments should help individual investors
throw the right questions at their forex brokers - scammers or
otherwise.
|