Financial Markets and Advantages of Forex
Third session of Forex Training
Welcome back to Forex professional training in financial markets.
In this session we are going to introduce financial markets and advantages of Forex. The first part of this session is related to the history of financial markets.
History of Financial Markets
These markets were formed immediately after the first ever trade was made. With the rapid technological progress and industry expansion, the amount of imports and exports between countries has dramatically increased.
As a result, the core of foreign exchange and financial market relations were established.
The beginning of the computer age and the birth of the Internet led to the ever-increasing speed and ease of making these transactions. This made it a bigger business than ever.
High investments in this business from banks and other financial institutions have created the necessary trust between buyers and sellers that we know today. This has made free and easy trading possible.
These days many merchants and traders prefer to do their business, either through specialized software, or on the legal websites of banks and financial institutions.
What is more, neither parties see each other in person or the product physically, this system is only possible with the credit and insurance that banks and financial institutions have established.
Different sections of financial markets
All Financial markets have different sections, here we have broken it down into five.
- The first section is called a “Stock”. With the help of financial institutions and other companies, people can either buy or sell these stocks all over the world. For example, in England, London’s Stock Exchange has provided people with the chance of buying and selling stocks.
- The second section which most people show interest in is called an “Index”. This is where instead of buying a single share of a company, many people intend to buy an index of that share. These can be traded internationally. In America these are known as “S&P 500” or the “Standard & Poor's 500”, and in Germany they are known as “DAX” (Deutscher Aktien index).
- The third section of financial markets that interests traders is “Commodity”. This is where most people intend to buy and sell various goods such as gold, silver, oil, wheat and so on.
- The fourth section is commonly known as “Bonds”. The government’s bonds, and non-governmental shares with or without fixed rate security are easy to purchase. For example in the USA, department of Treasury offers such bonds.
Forex (Foreign Currency Exchange)
- The fifth section is related to the foreign currency exchange and Forex. This is the largest part of the market. In this section, legal parties intend to buy and sell foreign currencies.
For instance, when you take British Pounds or US Dollars to exchange for any other currency; you are selling and buying foreign currency. These kind transactions make up the majority of trades on all financial markets.
Different trades in financial markets
There are a variety of different trades that can be made within financial markets. We will look at a few here.
Instant or Spot trade
The first type of trade is made using instant contracts, better known as a spot trade. In this type of contract, the goods being traded are at the owners’ discretion. This means they have no obligation to change the contract or their position within the trade.
For example, if you were to buy a house or a gold coin, it is down to you how long you hold onto these items, and you are free to wait for the right time to sell them on.
The second type of trade is an upcoming or future trade. In these contracts, a fixed future date should be settled on by both parties (as an expiry date). These trades require the buyer to pay a certain amount as a deposit.
If the expiry date is reached, then the owner must sell the given product, if it has not been sold yet.
The third type of trade is called an Option trade. These are exactly the same as the future trades we just looked at, except that the agreed upcoming date of the trade can be changed.
However this can only be done if both parties agree on the change of the date. The consequence of this increased flexibility is that these trades are more expensive to make.
The forth type of trade is about self-contract and is called a forward trade. In these trades the buyer is required to pay the full amount up front and receive the goods on a future date.
Advantages of using Forex in comparison to other markets
The next thing that we will talk about in this session are the benefits of using Forex trading market.
- The first benefit is that Forex is operational 24 hours a day. Since Forex is a global market, trading is continuous as long as there is a market open somewhere in the world. It is an interbank network, which works day and night, meaning any party can make their trade at any time.
- The second benefit is that Forex market also enjoys the highest level of liquidity. There are always buyers and sellers in this market who make trades of any amount at any time. Trades are made in two ways in Forex: traders can buy currency before its value rises, thus making profit; or sell currency before it drops, again deriving profit. This is an advantage that other markets do not offer; therefore, there are many opportunities to make a profit.
- The third benefit is that Forex allows you to use Leverage. Leverage means traders can enter the market at a position that they think will bring them more profit, even if that position needs more funds than their trading account capital would allow. On the other hand as its drawback, traders face higher amount of loss with less movement against prediction.
Finally, with the current growth in technology, any party can monitor their trades using Internet even on their smartphone. This shows once more that this is an ever-growing market.
That concludes this session, until next time and another session take care.