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Interested To Know About Foreign Exchange Basics? Foreign Exchange Basics For Fresher
So you are a complete layman and the only place where you have heard the word Foreign Exchange is probably a news channel. You may or may not decide to launch yourself into foreign exchange trading just yet, but still it will be good to know how can you directly participate and make profit by having your stakes in the booming world economy. Consider the information below as a fresher's course into foreign exchange.
Trading in foreign exchange was done by only governments and big financial institutions earlier. But today, even general public can participate in, albeit via authorised stock exchange brokers. The business in foreign exchange market, like any other market, is about buying and selling. There is a Bid-Price, at which the maker of the market is eager to buy. And then there is something called as the Ask-Price. It is the price at which the maker of the market is eager to sell. It is also referred to as the offer rate.
To understand better, the bid rate is actually the rate at which the deposits are taken. And similarly the ask price is the rate at which they will make loans. Whatever is the difference between the two, it is known as a spread.
In case of Euro zone, where London is the most vigorous market, we have two components - the London Interbank Offer Rate (LIBOR) and the London Interbank Bid Rate (LIBID). So again as explained before, LIBID will be the rate at which banks will allow deposits from other banks. And LIBOR will be the rate at which the bank will loan to other banks. The difference between the two is called as the interbank spread.
The Euro zone markets mostly have the following features:
• Smaller Spreads
As compared to domestic US markets, the spreads are much smaller in the Euro currency markets. To cite an example, the spreads in US foreign exchange markets could be up to 3% (the difference of loan rate and deposit rate). While the spread for a Euro currency can be as less as 1% or even lesser.
• Less Regulations
• More Short- term Loans
• More competition
• Usage of indirect quotes
Indirect Quotes depict the price of the home/domestic/term currency with respect to foreign/base currency. Also the London market is an acclaimed most active foreign exchange market. It leaves behind even New York and Tokyo , though with very less margins.
So next time do not get intimidated when people talk of foreign exchange, keep your ears open and you are sure to grab more. Who knows it might fetch you a fortune someday.
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