Understanding Foreign Currency Trade in Detail

Understanding Foreign Currency Trade in Detail

Forex currency trade is in simple terms a transaction in the forex market that involves the sale and purchase of different currencies. Trading in foreign currency doesn't demand any special training. Anyone can participate in it mostly because it's fairly simple to understand and learn how the trade works.

Who does it involve ?

For anyone interested in learning more about forex currency trade, it's important to first of all know and understand who the players in this trade are. Normally, it takes place between and among major financial institutions, retail currency traders/speculators, central banks, firms with overseas operations, government institutions, large multinational firms, and the like.

Regulation and major foreign currency trade centers

This type of trade is usually regulated by central exchanges. An OTC market, also known as an Inter Bank Market refers to the place in which forex currency trade takes place. Usually, it’s done directly over a global electronic network. Currently, the main forex currency trade centers of the world are New York, Sydney, Tokyo, London, and Frankfurt. All run for 24 hours a day. 

Putting into consideration the existing world time zone, Sydney is usually the first center where the trade begins before spreading to Tokyo, London then New York. This movement has resulted into flexibility whereby foreign currency traders can easily take advantage of the shifts in currency rates brought forth by political, social and economic causes. 

Making profits from foreign currency trade

Anyone who looks to learning foreign currency trade, mostly with the goal of making gains out of it, should begin by learning how to track and analyze the price movement of foreign currencies.

Every currency of the world has a three later code that is usually used to list it on the forex market. The most common ones include USD, JPY, CHF, AUD, and EUR. Most traded currency pairs include GBP/USD, USD/JPY, AUD/USD, and EUR/USD. In each pair, the first currency is referred to as the base currency whereas the second is referred to as the quote or counter currency.

In making profits, the rule is much the same like with other any other trade- buy low and sell high. For instance, one can buy EUR and sell USD or buy USD and sell EUR depending on the current prices of the currencies.

Other important terms you will come across in forex currency trade include Bid and Ask price/Spread. Bid price refers to the price at which a forex broker is willing to buy whereas ask price refers to the price at which a forex broker is willing to sell. Thus, bid price is basically the rate at which a trader should sell while ask price the rate at which a trader should buy.

While trading, you have the option of selecting your preferred pair of currency you would like to trade in, the size of the transaction and the rate at which you wish to trade. It's up to you to decide whether to buy or sell. 

Lastly, it's very important that you clearly the concepts of the foreign currency trade. This includes things such as market psychology, forex trading systems, managing risks and so forth.

Generally, foreign currency trade can look a bit tricky in nature but remember that once you put all that we've looked at into consideration and invest in looking for more information, then success in this trade is guaranteed.

The difference between foreign and domestic trade

The aspect of trade whether locally or internationally is the same. This is because trade involves the exchange of goods and services. However, there are several factors that stand out when it comes to domestic trade and international trade. In this article, we are going to look at the difference between foreign and domestic trade.

1. Scope

In domestic trade, the scope is limited to certain geographical position. This means that the trading activities are limited to a single boundary. However, in international trade, the scope is wide as trading activities can take place in different boundaries.

2. Immobility of factors of production

Among the four factors of production, labor and capital tend to challenging in terms of movement. Unlike in domestic trade where there are few restrictions of movement, in international trade it is very difficult for these two factors to be mobile. In domestic trade, labor is distributed according to opportunities available. This is because wages tend to be on the same level only standards of living differ from one place to another. In the case of international trade, wages and check population differ from one country to another. On the hand, capital moves freely in the same country as opposed to different countries.

3. Different currencies

When it comes to domestic trade, the currency being used is the same thus making transactions to be easy and simple. In international trade, each country has its own currency. This makes international trade to be very dynamic and complex. Exchange rates for currencies also become quite challenging as they differ from one economy to the other.

4. Different cultures

Understanding the culture of a nation is very key to doing trade. This is because culture defines and encompasses what a society can do ranging from customs to business practices. In domestic trade, it is very easy to understand the culture around since you are already familiar with it. However, it is very important to have good knowledge of the culture of the foreign market that you seek to venture in to. This way, you will be prepared on what to expect from a certain region and be able to fit in more smoothly. It is also very important to respect the culture of that country and flow with it other than to try change how things are done.

5. Different political and legal systems

Each country has its own political and legal systems. Unlike in domestic trade where the political and legal system encompasses the whole country, in international trade the systems differ from one country to another. Therefore, it is very important to understand the political and legal systems of foreign countries when doing international trade. This is because each government has different rules and policies when it comes to foreign firms as well as products. It is very key to abide by the policies of that particular country to ensure that there are no long term negative implications to your firm that can affect your business. It is also advisable to get legal counsel of that particular country so that you are fully aware of how the policies in place can affect your business if not implemented. 

What is Foreign Trade ? Types and Importance of Foreign

What is Foreign Trade ? Types and Importance of Foreign

What is the foreign trade? Foreign trade is the exchange of goods, capital, and services. In most states, it represents a share of gross domestic product. Although foreign trade has been around for some time, its social, economic, and political importance has been on the rise in the recent centuries. Ideally, all countries need goods and services to satisfy the wants of their people and no country can produce all the goods that it needs this means it has to buy what it needs from other countries that produce those goods. On the same not, it sells to those countries what it has on surplus.

What moves foreign trade

Foreign trade can be moved by almost anything. In most instances, foreign trade is a good guide to a country’s fortunes. This means that most factors affecting the economy also affect foreign trade. Since some factors are more important than others, they should be a priority. One of the factors that impact on foreign trade is the money supply controlled by the central banks. Normally, an increase in the money supply often leads to a fall the value of currency. This is the norm of demand and supply. More so, increasing interest rates often increase the supply of money.

Types of foreign trade

Foreign trade can be divided into 3 major groups namely entrepot, import trade, and export trade. Entrepot trade means importing goods from one country with the sole purpose of exporting them. Export trade is the sale of goods from one country to another while import trade means buying of goods by one country from another. Depending on a country’s needs, it will choose the type of foreign trade that it wants to engage in. This is often dictated by what it has in surplus or rather what it lacks.

The need of foreign trade

· Optimum utilization of resources- Because of specialization, wastage of resources and unproductive lines can be avoided. This means through foreign trade resources are channeled to the production of goods that yields highest returns. This leads to rational utilization and allocation of resources.

· Division of labor- At the world level, foreign trade leads to specialization and division of labor. Normally, some countries have a lot of resources while others lack resources. Through foreign trade, they export raw materials to countries that have skilled manpower to finish the production of these goods.

· Availability of multiple choices- As a consumer, you are given a variety of choices through foreign trade. For instances, it makes a variety of goods and services available for them so that they can be able to choose what they prefer.

· Equality of prices- Typically, prices can also be made stable through foreign trade. This is done through keeping the demand and supply in a stable position which thereby stabilizes tee prices of goods and services.

Role of commercial banks in foreign trade

Commercial banks often provide the instruments and financial structures needed to carry out the foreign trade. They ensure that there is transparency and safety in the flow of money and documents. For instance, if you are buying goods from abroad, the seller will want to be sure of the payment and you will also want to be sure that all the terms and conditions will be met. This is why commercial banks issue a letter of credit in favor of the seller. In other words, commercial banks facilitate the payment of money once during the trading process.