Forex Trading Overview
Forex is the coming together of banks, businesses, governments, investors and traders to exchange and speculate on currencies. It is the largest and most liquid of all markets. It is the trading of one currency against another. It is not a central marketplace, but an over-the-counter trade. Banks vary in price. Feeds from the different banks are taken into account by a broker who then works on a rough average. The broker effectively performs the transaction, creating the market.
In 1876 it was decided that all currencies should be backed by gold. This was called the Gold Standard. However, linking currencies to the price of gold led to boom-bust patterns. With the outbreak of World War II, most European countries did not have enough gold reserves to back up their paper money. As a result the gold standard was dropped. It was then decided that there would be fixed exchange rates, with the US dollar becoming the primary reserve currency and the only one backed by gold. This was called the Bretton Woods System.
In 1971 the US announced that it would no longer exchange gold for US dollars in foreign reserves. This led to the end of the Bretton Woods System. The breakdown of the system led to the acceptance of floating foreign exchange rates. During the 1990’s foreign currencies became widely electronically traded.
The most important trading centres are London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.
CFD Trading Overview
CFD stands for Contract For Difference. It is a contact between two parties in which the seller will pay to the buyer the difference of the current asset value and its value at contract time. This is based on a positive difference. However, if the difference is negative, the buyer pays the seller. This allows traders to take advantage of prices moving up (also known as long positions) or moving down (short positions) of the underlying financial instrument. In essence it is trading of various derivatives without actual ownership.
Credited to Brian Keelan and Jon Wood, CFD’s were developed in early 1990 in London as an equity swap of sorts. They were traded on margin. Originally used by hedge funds and institutional traders to hedge their exposure on the London Stock Exchange, they were made available to retail traders in the late 1990’s. CFD’s were further popularised by a number of UK companies. Around 2000 people realised that the benefit of CFD’s was the ability to leverage any underlying instrument. This kick-started the growth of CFD usage. CFD providers quickly expanded their LSE offering to include others.
CFD’s can currently be traded in United Kingdom, Hong Kong, The Netherlands, Poland, Portugal, Romania, Germany, Switzerland, Italy, Singapore, South Africa, Australia, Canada, New Zealand, Sweden, Norway, France, Ireland, Japan, Austria and Spain.
Binary Options Overview
Binary means two values. In finance a Binary Option (contract) is an option where the buyer/owner will pay a fixed amount for an underlying service or asset. The payoff is either a fixed amount or nothing at all. This type of trade is also known as All-Or-Nothing. Binary Option trading is fairly new.
The potential profit of a binary option is known before the purchase is made. These options can be bought on either an “Up” or “Down” call. This means that an investor can go long or short on any financial product simply by buying a binary option. Binary options are offered against a fixed expiry time which may be e.g. 30 seconds and up to 30 minutes, an hour ahead or to the close of the trading day. There is no need to spend vast amounts of cash to get into this type of trading. Depending on the call a trader has made, he can profit from the up or down movement of the underlying asset.
A binary option automatically exercises, meaning the option holder does not have the choice to buy or sell the underlying asset.
Social Trading Overview
In former days trading was dependent on the locations of customers, brokers and exchanges. Then the internet came along and made way for the online trading phenomenon. The advent of Web 2.0, Facebook and Twitter gave rise social trading.
Social trading has a number of advantages. Firstly, it allows for the free flow of information between individual investors. Knowledge is power. It also allows a kind of Cooperative trading. Individuals can work together, pool funds, share their knowledge and divide research among themselves to achieve a common goal.
In essence, social trading is the process through which one trader relies on another for information to make a trading decision. The collective wisdom of a thousand is better than one. It is a network from all over the world allowing people to share knowledge, views and trades.
By its nature, day trading (inculding forex, cfd, binary options and social trading) carries a risk.