What is Forex Trading and How Does it Work?

Read the Transcript - What is Forex Trading

In 1971, most international currencies stopped being linked to the price of gold. And since then, with the heavy involvement of central banks and cross border businesses, the market has positively boomed.

 

It's a growing, liquid and very quickly moving market, and for a lot of businesses, it's an essential one. But with sheer enormity comes a very high degree of volatility.

 

You see, in a market that never sleeps, pricing never stops. Every second of every day, Monday to Friday, there's a live quote for every actively traded currency in the world.

 

This makes the ability of businesses to lock in a fixed rate for future payments and receipts a very valuable commodity.

 

Knowing what crucial cash flows will be in the future allows businesses to manage their money and make forecasts with more certainty.

 

Out of necessity, special tools have been developed for exactly this purpose.

 

These tools, available through foreign exchange providers, are spot contracts, forward contracts and futures contracts.

 

Spot contracts are the most basic method of exchange and are used to trade currency at whatever the exchange rate is at any given second on the day the trade is made.

 

Like buying a cow at auction, you pay the market price and take it away.

 

Forward contracts involve two parties agreeing on an amount and exchange rate for settlement at a future date. These are best locked in with foreign exchange providers, who can ensure swift and seamless transfers on settlement date.

 

Futures contracts have the same function as forwards, except they're traded on exchanges and are usually used to speculate rather than hedge transactions. It's like making a bet with someone, with a third party in the middle who holds the cash.

 

So those are the products, and they're offered by a wide range of exchange providers in a very crowded marketplace. But as a business, you want to ensure you're getting the best. The best deal execution, the best service, and the best market information available.

 

And this all boils down to two things, information and relationships.

 

Because in such a big, volatile market, where even a small difference in price could carve a significant slice out of your margins, working with the best information and the robust tools of a trusted and transparent provider is the best way rest easy.