Beginner’s Guide to Online Forex Trading – Chapter 2: What is done in a Foreign Exchange market?

Beginner’s Guide to Online Forex Trading – Chapter 2: What is done in a Foreign Exchange market?
‘Trading of money’ would be the simplest answer! A typical Forex trading is the one where a currency is concurrently bought while the other is sold. These transactions are essentially done in pairs, usually through a broker or a financial agent. A simple example can be of the British pound and Japanese Yen (GBP/JPY) being sold and purchased simultaneously or vice versa.

Forex trading is conceptually similar to buying shares in a particular country. Share prices indicate the current health status and future prospects of a nation’s economy. In the same fashion, the currency also is a reflection of a country’s financial well being. Similarly, the comparative exchange rate of the country’s currency with other currencies also indicates the financial health of a nation. So buying, say a Euro, actually buys you a share in the European economy. The difference between the two trades is that unlike the stock/ share markets the Forex markets do not have a specific physical location or office place. The entire business is weighed as ‘Interbank’ market and carried out Over-the-counter (OTC). It completely runs on the banking institution’s electronic network.

The Forex business was originally meant to be carried out by banks and big financial institutions. Even until the late 1990’s it was considered a venture only for the so called ‘big guys’. The reason was that it required not less than 10 million bucks to just start off in this business.

But with the rise in the use of internet, Forex trading firms expanded their online business and started to offer Forex business opportunities to a whole lot of retail traders- the so called ‘little guys’.

In this trade, all the currency symbols have three letters. The first two letters represent the country’s name and the last letter represents the name of the currency.