It’s now possible to day-trade currencies as well as stocks. If you’ve ever wondered how the foreign exchange market works, you might find this article useful. It provides an overview of some of the fundamental concepts of this exciting market. Armed with this information and your foreign exchange currency converter, you’ll be trading like a pro in no time.
Foreign Exchange Rate, as seen on the Foreign Exchange Currency Converter
A foreign exchange rate is the relative value between two currencies. More precisely, it is the amount of one currency needed to buy or sell one unit of another currency. In expressing foreign exchange rates, two methods are commonly used.
The most common method expresses the amount of currency required to buy one U.S. dollar. For example, if a foreign exchange currency converted quotes USD/CND at 1.1700, that means one U.S. dollar can be exchanged for 1.17 Canadian dollars. The other common way of expressing exchange rates is simply the reverse of the first method.
If you use the second method, your foreign exchange currency converter will give you the US dollar amount that can be exchanged for one unit of foreign currency. For example, a quote of CND/US at 0.8500 means one Canadian dollar can be exchanged for 0.6700 U.S. dollars.
If U.S. dollars are not used in expressing an foreign exchange rate, then we usually refer to the "cross rate" to express the relative values of the two currencies. For example the quote DEM/SFR at .7000 means that one German Mark can be exchanged for .7 Swiss Francs.
Foreign Exchange Currency Converter: Basis Points
A foreign exchange currency converter usually gives you a whole number integer followed by 4 decimal points. Each such 0.0001 is called a basis point. So, if an exchange rate goes from 1.4510 to 1.4540, the currency is has changed by 30 basis points.
The Forex Market
To buy foreign products or to invest in other countries, corporations and individuals need often first acquire the currency of the country with which they intend to deal. Also, exporters often demand payment for their goods or services either in their home currency, or in U.S. dollars. (U.S. dollars are accepted worldwide.)
The Foreign Exchange Market ("Forex" market) is where most of the buying and selling of currencies takes place. The Forex market is by a large margin the most important financial market in the world. Trading volumes sometimes surpasses USD 1.5 trillion daily. The major traders on this market are the very large commercial banks. The foreign exchange currency converter gives up to the minute prices.
There are five major centers of Forex trading: London, New York, Zurich, Frankfurt and Tokyo.
The Forex market consists of a worldwide network of traders (primarily inter-bank) connected by telephone lines and computers. Forex traders constantly negotiate prices, and the resulting bid/ask price for a particular currency is then fed into computers and displayed on official quote screens. Forex exchange rates quoted between banks are referred to as Inter-bank Rates, and may very slightly from the rates provided by a consumer foreign exchange currency converter.
Foreign Exchange Spreads, not appearing on foreign exchange currency converters
Rates on the Foreign Exchange market are quoted as two-tier "bid/ask" rates. For example a U.S. dollar/German mark quotation may be expressed as 1.6000/15. The Forex trader who quotes this rate is saying that he is willing to buy marks at 1.600 and is willing to sell marks at 1.6015. The "spread" is the difference between the purchase and the sale rates. This represents the expected profit to the Forex trader. The spread on a given currency may vary widely, depending on whether the currency is weak or strong, and on its proven or predicted volatility.
Most people will not be able to buy foreign currencies at the quoted Forex rates – or even at the rates provided by online Foreign Exchange Currency Converters. Instead, they’ll have to buy currency from a bank, which will charge a commission (or a higher spread) than listed in the Forex market. This way, the bank makes a profit on the transaction.
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DCErates.com is a division of discount-currency-exchange.com Inc. The DCE website offers a daily look at world currency rates, news and strategies, a currency converter, and currency graphs. DCE also acts as an agent to help individuals and businesses find and fulfill currency trades at the best exchange rates possible.