To jump this hurdle, we go to the bank to handle the currency exchange, or to a number of foreign currency exchange companies we can find on the internet, who will invariably quote far better rates of exchange. Believe me they will, they could not exist if they did not offer a better deal.
You do not have to be a mechanic to know some essential words about a car like the steering wheel, the hand brake, clutch pedal, the engine etc. But you do need to know these fundamental words to be able to understand what they refer to when becoming a car driver otherwise life would be hard.
Similarly, it is important to know a little about the foreign exchange market so that when the day comes and you will be need to buy foreign currency to get that house of your dreams or anything else abroad, you are not at a disadvantage.
The FOREIGN EXCHANGE MARKET also called FOREX or FX, has no trading centre.
Unlike the London Stock Exchange or the New York Stock Exchange centres, it has no fixed abode, but manages very well and is extremely active.
There are hundreds of brokerage companies and banks, who deal between themselves including big corporations. Put these on one level. On another level, there are smaller agents who handle the buying and selling of the foreign currencies, going by the rates as signalled by Reuters or other agencies. These rates are aligned to the actual events taking place non stop in the market. . The difference between these two levels is a wholesale and retail classification as existing in other trades. When the media talk about the foreign exchange market, it is the wholesale level they refer to.
Foreign exchange currency institutions have better access to obtaining a more advantageous rate of exchange than the ordinary small company or the man in the street.
The foreign exchange market operates 24 hours per day.
BID is the rate at which a dealer is ready to purchase the base currency.
OFFER is the rate at which the dealer is ready to sell the basic currency.
The difference between the BID and ASK price is called the SPREAD.
The MARKET MAKERS make the profit from the spread. They make no commission.
BASIC CURRENCY is the currency against which the other currencies are quoted.
BULL MARKET refers to a price rising market.
BEAR MARKET refers to a declining price market.
BOTTOM: a description of a price decline meeting heavy support against further price decline.
CABLE: When the steel cable was connected under the Atlantic in 1850 thus linking USA with UK enabling telegraph transmission between the London and New York Exchanges, it was called ATLANTIC CABLE. Satellite and optic cables are now used, and the word CABLE refers to GBP/USD currency pair rate.
CROSS RATES: This refers to currency pairs where the USD is not included like GBP/EUR or GBP/JPY
MARGIN refers to a deposit in cash required to cover the possibility of loss the client may encounter trading the foreign exchange.
MARGIN CALL refers to a requirement for additional money, to make up the minimum cash deposit needed to cover any losses the client may encounter trading in the foreign exchange market.
VOLATILITY refers to the extent of price fluctuation.
There are of course, many more terms used in the foreign currency business, but you have here a selection which will help you to know some of the basics.
Good luck.
When you consider that various speculators, hedge funds, governments as well as companies, plus countless private investors who take part, it is hardly surprising that this market is so strong and that the estimated daily average turnover of the foreign exchange market is over 3 trillion US Dollars.
With London, New York, Tokyo, Frankfurt and Sydney as the chief trading centres, the action hardly ever closes.
The spot rate, is by far the most asked for. This transaction has to be settled within two business days.
Bid, refers to the price at which the buyer is prepared to buy the currency. It is like when you are at an auction and you are putting your hand up to say you are willing to purchase something at that price.
Offer, means the price at which an amount of currency the seller is ready to sell.
Limit order, is when you give instructions to buy or sell a currency at a predetermined exchange rate.
Inter bank rates, means the bid and exchange rates when international banks buy and sell between themselves.
Spread, is the difference between the bid and ask price of a currency.
Stop loss, is when an order is given to purchase or sell a currency at a price level set by the client on a particular trade which if reached, will close out the particular position at the stated price.
Transaction date, is the date on which a foreign exchange trade is being done.
Settlement date, is the date which foreign exchange contracts settle.
Cable, is a name given to the US Dollar/British Pound rate in the foreign exchange market.
EFT, is the Electronic Fund Transfer which is the transfer of money between banks.
Every currency has a three letter code such as for the Euro (EUR), for the British Pound (GBP), for the US Dollar (USD), for the Japanese Yen (JPY), for the Australian Dollar (AUD), for the Swiss Franc (CHF), for the Canadian Dollar (CAD). Actually, these are the major trading currencies and all commonly traded currencies are called the majors.
When there is a quote in currency pairs, remember that the first currency is called the base currency. The second currency is called the counter currency. As an example when you get a quote GBP/USD at 1.96 it means that for one GBP you will get 1.96 USD. So for ten thousand pounds you will get nineteen thousand six hundred US Dollars.
The many foreign currency exchange companies which you can find on the internet will gladly give you a quote, and by phoning around you can find the best currency rates. They will be better than a high street bank is likely to offer and they will give you a very fast service. Furthermore, most of them will not charge you any commission or the cost of the electronic bank transfer.
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