Why trade Forex? - Forex Trading over Share trading
There are many companies that offer forex trading to customers using various schemes and platforms. Each one will have different terms and conditions and different pros and cons. However the principles are broadly similar.
24 hour trading
There is no one single trading market for currency so effectively you can trade twenty four hours a day through different time zones. Generally speaking the day starts in Tokyo, moves to London (08.00 GMT) and closes in New York (opens 13.30 GMT). The market closes Friday 22.00 GMT and reopens Sunday 20.00 GMT. Therefore it is possible to react to any significant breaking news that affects the market. For example if unexpected news breaks when the Share Market is closed you can trade for profit on the Foreign Exchange market.
The diary of some eaxmple online trades: JPY/USD and CAD/USD can be viewed.
Generally speaking when you trade Forex the Forex trading company will not charge a commission and therefore it is an attractive proposition for investors, particularly if you are a regular trader. Normally the Forex Company will make their money on the 'spread' - i.e. the difference in the price between the actual market price and the price that they charge you. Usually if you are trading 'major' currencies such as USD, EUR, JPY, GBP then the spread will be less than for 'minor' currencies such as NZD or volatile currencies such as ZAR. When choosing a Forex Trading Company it is important to take into account their spread as well as other considerations such as the trading platform.
The fact that forex market trades 24 hours and has such large volumes of trade means that the market is very liquid. What this means is that there are always buyers and sellers in the market. This leads to price stability, large volumes and therefore thinner spreads. The liquidity is provided by Banks who allow companies, traders, institutions and others to trade.
A big advantage of Forex trading is the fact that you can gain Leverage or gearing. In effect your stake is a deposit for a much larger trade. For example, a USD 1,000 deposit can command positions of up to USD 100,000 through leverage depending on which Forex company you use. Therefore you can realize a big profit, (or loss!). So instead of putting up USD 100,000 you are putting up USD 1,000. If the market moves in your favour by 10 points in effect you will be gaining 1,000 points.
Profit potential in falling markets
Another big advantage of Forex Trading over Share trading is the fact that you can make money if the market is falling. Instead of selling GBP to buy USD you can sell USD to buy GBP if you feel that the USD is strengthening. As the market is 24 hours and large volumes are traded there are always opportunities whether a currency is strengthening or weakening in relation to another currency. For example if the EUR/USD declines it is because the U.S. dollar gets stronger against the Euro and vice versa. So, if your opinion is that the EURUSD will decline (that is, that the Euro will weaken versus the dollar), you would sell EUR now and then later you buy Euro back at a lower price and take your profits.