Written by: PaxForex analytics dept - Friday, 27 June 2014 0 comments
Forex market can be compared with a simple exchange office in your city. Only the order of the amounts of exchange there are several other. And the principle is the same. As large financial companies, corporations and foundations have their own banks and conduct currency trading market transactions through them, we, ordinary people, conclude agreements with banks or Forex broker companies to maintain our operations in the Forex market.
Forex Standard Lot is $ 100.000
In the Forex market traders make transactions with certain amounts. Minimum lot involved in the auction is $ 100 000. However, not everyone has such a big sum. In order for you to have the opportunity to make a deal, the brokerage company or bank gives you a free loan at the time of the Forex transaction. Also, there are different types of Forex accounts with their specificities.
The possible amount of loan determine the leverage. As an example, if the leverage of 1:10, a lot, say, 100 000, when to make such order you must have in the account $ 10 000. The higher the allowable leverage, the higher volume of transactions that can be performed with the same amount of capital placed with a broker. The higher volume, the higher profit or loss you can have. The higher leverage, the more loan you can get and more profit you can earn, and of course more risk you will take.
But you can ask: “Hey, stop! Banks and companies do nothing for free! So why they will provide me this loan?” And you are right!
The bankers and Forex brokers really know how to manage money. What is their interest? Think of your local currency exchange office: there is some graph like "purchase price" (or buy) and "selling price", and there is a distance between buying and selling. This difference is called the spread.
Thus, the spread is the difference between the ask price and selling price (bid). The spread is the profit of the exchange office. Forex is an international currency exchange market. And who is one of the participants in the currency trading market? That's right - the big banks.
Draw an analogy. As soon as you get up in the Forex transaction, the bank or Forex broker will calculate the spread. Spread is a profit of banks or brokerage
companies at the Forex market. Therefore, the bank financially beneficial to the currency trading account transactions occurred as often as possible. And for you, traders, it is advantageous to have a provided leverage and opportunity to work in this market. You are interested in the Forex broker company and the company is interested in you. This is the mutual interest.
There is another important thing on Forex market called swap. Swap arises due to the overnight interest rates for each currency being different. Since currencies are always traded in pairs, you always need to borrow one currency in order to buy another, so it follows that you have to pay interest on the loan, but you also receive interest on the currency you are holding. If the difference between what you pay and what you receive is positive, then you are eligible for a net swap credit. If the difference is negative, that is if you pay more interest than you receive, then your account will be debited the appropriate swap amount.
Most brokers use interbank overnight rates for their base calculations, update them daily, and then skim a little off the top. Other brokers update their rates only from time to time, and others still don't bother with the idea of swap at all. You will notice a lot of Forex brokers claiming to be swap-free in order to attract Islamic clients who are forbidden from engaging in interest-bearing deals due to religious reasons.
Most brokers apply swap daily at New York close, and triple the amount on Wednesdays to make up for Saturday and Sunday when there is no trading, but there are exceptions.
These facts show us that currency trading market works by principles of any other business. Therefore, we choose the most attractive and reliable Forex trading environment. Choosing a bank or brokerage company is very important.