The term ?forex? stands for ?foreign exchange?, the trading of world currencies. Most of us are familiar with the term ?trading?, which means to buy and sell a product or service with the aim of realising a profit. Forex trading is therefore the process of buying and selling currencies with the aim of making a profit.
If a forex trader, for example, believes that the value of the Euro will appreciate in the future, he or she will buy a certain quantity of the currency in the hope of selling it at a profit at some point.
The price of a foreign currency, such as the Euro, is always quoted in relation to that of another currency, often the US dollar or the British pound. If we say the price of the Euro is $1.41, it means you have to pay $1.41 to buy one Euro.There are many websites where you can sign up to spread bet on forex markets. However, it is advisable to first use a free demo account, which many sites offer. With a demo account you will have the opportunity to developing your understanding of the marketplace before risking any of your hard earned money.
A highly promoted aspect of FX spread trading is leverage. This means that to buy ?10,000, for example, you do not have to find the total Sterling equivalent. Instead, all you need is a small deposit, often as little as 1% of the purchase price.
Once you have entered the trade, you receive the benefit of any price movement on the full ?10,000. The downside of this is that you will also have to stand any losses in full. If you are forex spread betting and use a guaranteed stop loss you cannot, however, lose more than you risked on that particular trade.
In this example, should there be a 1% increase in the value of the Euro, you would make ?100 on the trade, which at a leverage of 100:1, equates to a 100% percent profit.
If the value of the currency fell by 1%, on the other hand, you would lose the same amount of money; the entire ?100 that you risked on the trade.
In FX spread betting , you do not have to pay any commission to buy or sell a currency. The commission is built into what is known as the ?spread,? the difference between the buying and selling price of the currency. The price at which you buy is called the ?offer price? and the price at which you sell is the ?bid price.? At any particular time, the bid price is marginally lower than the offer price.
Let us assume that you buy Euros at an offer price of ?0.86980. At that moment the bid price will most likely be in the region of ?0.86977; the actual spread differs from broker to broker. If you immediately sell your Euros, you will therefore make a small loss, since the bid price is less than what you paid.
By the next day, or in a few days time, the bid price might be much higher than what you originally paid and you would therefore make a profit. Unfortunately, if the price were to fall, you would make a loss.
Whilst there are no commissions on spread bets if you use a rolling daily spread bet and keep your trade open overnight then you often pay a small overnight financing fee.
Margined FX trading and Financial Spread Betting are margined investment formats, these products involve a high level of risk. Losing trades may exceed your original stake or investment. You should always invest using money that you can afford to lose; always ensure you fully recognise the risks involved when trading these investment formats. It is important to note that spread betting and margined FX trading may not always be suitable for all types of investor so where you think it is necessary obtain impartial financial advice.
Source: http://www.sharilynbanks.com/investing/what-is-fx-trading.html
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