Forex, Options, Stocks & Commodities – A Quick Overview

The forex market is the most prominent financial market in the world. Traditionally, the word forex was only used to refer to exchanging different currencies to do business …

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The forex market is the most prominent financial market in the world. Traditionally, the word forex was only used to refer to exchanging different currencies to do business or when traveling. Today, forex is more of a businessand an investment. Some people survive purely on forex trading as their only source of livelihood and income.

Unlike stock trading, forex trading and investment are not centralized. Participants who include individual traders, banks and other financial institutions exchange through the ECN (electric communication network). This network allows more people around the world to participate in it.

Forex trading is purely the simultaneous selling and buying of currencies. The currencies are traded in a pair, for example, EUR/USD. The EUR, in this case, is the base currency while the USD is the quote currency. For example, if the exchange rate between EUR and USD is 1 Euro for 1.2 dollars, then you will quote as follows EUR/USD= 1.2.

If you believe that EUR will rise in value to 1 Euro for 1.3 dollars, then you enter the buy position. The focus should be on the base currency. If you believe that Euro will lose its value, then sell.

Unless in some cases, where the government pegs the exchange rate at a fixed price, the exchange rate is dependent on demand and supply. The exchange rate of a currency reflects a number ofthings, chief among them, the economicstatus of a country, political environment, interest rates as well as people’s perception.

Forex differs from stock and options markets in some ways. Firstly, forex trading is not centralized; there is no centralized governing body or even a clearinghouse. Secondly, in forex trading, there is no limitation as to the position you want to take. Another difference is in the manner in which brokers get remunerated. In the stock market, brokers charge commission while in forex, brokers earn through the bid-ask spreads.

Stock Market Trading

When we talk of a share or a stock, we are referring to a section of an organization or company quantified in monetary terms. So when you purchase a share in a particular organization, you are investing in its future. The valuation of that share will keep changing based on how investors perceive that organization and of course how the company performs. At the end of a specified period, the company may opt to distribute its profits (dividends) to the shareholders. In other cases, the profit earned may be invested back into the company to improve its operations.

These stocks are commodities; they can be transferred from one person to the other. A broker will buy as well as sell these stocks through an exchange. When we talk of a broker, this could be any person specially licensed to trade the shares via the exchange. These brokers could physically be on the floor or could do so through a phone.

On the other hand, an exchange is like the trading ground, a form of a warehouse where people will sell and buy those stocks. A buy request must be matched with a sell request. In short, there must be sellers for there to be demand and vice versa. The process of matching sell and buy orders can be done by people or by computers.

Options Market

An option is in simple terms a right to sell or buy a stock at a future date. Note I used the word ‘a right’ and not ‘an obligation.’ If for example, you have a contract to buy 50 shares of company X at the end of the month. Currently, the shares are trading at $5 per share, but you have agreed to purchase them for $6 a share at the end of the month. If at the end of the month, the shares are trading at $7 per stock, then you have made a profit of $ 50. Likewise, if by the end of the month the price is at $5, then that is a loss, so you don’t have to buy it. An option to sell is called a put option, while an option to purchase is referred to as a call option.

Options have some benefits

Options are less risky than stock and forex market. Options generally cost less than shares; therefore, the overall risk is reduced. On the other hand, as a buyer, you have a right but not an obligation. It is only the sellers who have a responsibility, not buyers.

Take advantage of future events

If you expect a particularcompany to announce a product that is going to revolutionize the way we do things. You can participate in their options. It is a proactive way as opposed to reacting to changes in the market.

Commodities/Futures

The commodity market works more or less the same as any market you know. Commodity market provides us with a physical or virtual space to trade. One may opt to trade the commodities at their current price or do it for a future pre-determined price. Some of the commodities traded in these markets include agricultural commodities such as sugar and wheat or mined commodities such as oil and gold. Future contracts are contracts whereby a buyer and a seller agrees to transfer certain commodity to the buyer in the future at an agreed price. In this case, the buyer has to promise the seller a certain amount of money once the seller delivers the item in the agreed future period.

Investing in the commodity market

The most popular way of investing in the commodity market is through future contracts. The primary buyers and sellers of these commodities are speculators as well as users of the products.

The users make use of futures to plan their budgets with figures in mind properly. They try to mitigate financial losses attributed to extreme price changes. Manufacturers of beer in an attempt to normalize barleyprices will enter into future contracts where they are allowed to buy barley at constant rates over a period. In case of sudden spikes in prices, it will not affect their expenses or cash flow negatively.

For speculators, you will need to research on a good broker or brokerage firm. You will then open an account with your broker. You will then fund your account, and you will be good to go.

Just like forex, the commodity price is primarily determinedby the forces of demand and supply. Other factors affecting the commodity prices include the political environment of the producing country. For example, the gulf war affectedthe pricesof oil by a significantmargin. Brazil political environment by far affects sugar prices in the commodity market. Speculators will typicallyanalyze all these factors in order toknow which direction the market is likely to take.

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