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FOREX stands for Foreign Exchange Market.
The basis for making profit while working on various financial markets is a simple rule: to purchase cheaper and to sell more expensively. Thus all the work on various financial markets comes to consecutive trade operations on the purchase and sale of trading instruments: currency, stocks and their index rates.
During the last three decades Foreign Exchange market has integrated into the world's biggest financial market. The volume of daily transactions is about 1-3 trillion US dollars. The main currencies on this market are US dollar (USD), Euro (EUR), Japanese yen (JPY), Swiss frank (CHF) English pound sterling (GBP). The market players are banks and brokerage firms, corporations and export-import firms, various funds and individual investors. Nowadays millions of people around the world conduct trading operations on the Forex market and gain real profit due to fluctuations of currency rates.
Operations on the currency market are one of the main sources of income for banks and financial institutions all around the world. For example, in 1994, 80% of income of the biggest Swiss bank – the Union Bank of Switzerland (UBS) – came from conversional operations with currencies and only 20% îf income from the credits and securities trade.
Of course monetary assets of different countries have been exchanged since the notion of "money" appeared, as well as an idea to obtain profit from the differences in currency rates. Now it is not a new idea, but the transformation of the foreign exchange market to the modern stage with an opportunity to conduct conversional operations of such volumes arose only after an introduction of "floating rates regime" by the state-members of International Monetary Fund. Within this regime's framework, the rate of one currency to another is defined only by market supply and demand, thus it is not fixed but changes every second.
Currently the Forex market is a global telecommunication network of banks and different financial organizations. It does not have any fixed trading place and time restrictions - trading sessions start on Monday morning in New Zealand and close on Friday evening in the USA. Any person regardless of his/her whereabouts may become a market participant because only appropriate knowledge and Internet access are needed to successfully execute trading operations.
The main advantages of Forex over other financial markets are:
- Liquidity: the market works with huge amounts of money and gives customers complete freedom to open or close their position of just about any volume at the existing current price.
- Leverage: the main distinction of working on the Forex market is that a trader has an opportunity to purchase and sell currency without having the full amount of money needed for such an operation. To make a transaction, the player has to deposit an initial amount (margin) after which he/she can run transactions whose volume exceeds the invested amount many times. This is called leverage. So in case one deposits $10 000 USD into their account with a leverage of 1:100, they will have an opportunity to work with $1 000 000 USD.
- Round-the-clock trading access: ability to trade 24 hours a day (see: hours of work).
Other than Forex currency pairs, we provide an opportunity to conduct operations with Contract for Difference (CFD) and the USDX dollar index.
Contracts For Difference – is an agreement between two parties to exchange the difference in the contract price between the opening price and closing price when this contract is closed.
A wide set of available Forex trading instruments provides practically unlimited opportunities for diversification of financial investments and is always preferable among traders. Taking this matter into account, FOREX Ltd introduces a modern, dynamic, popular international financial tool – the CFD, an instrument that enables to organize the conduction of trading operations on the online classical stock market.
Contract for Difference is an over-the-counter market trading instrument that allows to trade on the stock market without a real asset investment. CFD offers you all the advantages of stock trading but in this case you are not able to collect dividends and do not acquire voting authority. Better to say it is a contract that mirrors the price movements of stocks, indexes and currencies. Nowadays CFD has become a traditional trading instrument of private European investors.
CFD operations are conducted based on the principles of margin trade, thus 10% of the contract price is enough to open a position. The result of the transaction (either profit or loss) is determined by the difference in the contract value between the opening and closing prices. One can hold an opened position as long as they wish. The transactions may be run during the New York Stock Exchange session time. FOREX Ltd provides an opportunity to carry out trading operations with CFD on shares of leading US Companies, and on exchange traded funds.
It is necessary to attribute the following to the main advantages of CFD:
- low margin requirements - required margin constitutes only 5-20% from the total contract cost;
- low commission rates - commission size is from 0,05 %;
- global and widely spread business - an opportunity to work from any point in the world via Internet;
- guaranteed order execution - an opportunity to place an order of any type that would be executed automatically in response to any market changes;
- diversification - CFD on the shares of leading US Companies and on exchange traded funds offers 36 additional trading instruments for Company clients;
- constant visual control - work on the stock market demands constant monitoring and control of the portfolio on the part of the trader, but use of online technologies considerably facilitates these processes.
For a clearer grasp of CFD essence, please consider the following example:
The trader makes a decision to open a long position (purchase) on Hewlett-Packard shares. The current share price stands at $22,09, and the amount the trader is interested in is 1 000 pieces. To carry out such an operation in FOREX Ltd, the trader will need an amount that will allow him/her just to cover the Margin. In this particular situation the required Margin is $2 209 (1000*22,09/10, where 1000 = quantity of purchased shares, 22,09=each share's price, and 10 is leverage). Also, when buying the specified shares, the trader pays a commission of 0,1%, ($22,09 - for this particular operation). In case trader one day decides to sell these shares, for example when the price rises to $23,09, the trader will make profit: (23,09-22,09)*1000-22,09 = $977,91). Therefore, to carry out such an operation, trader only had to involve $2 209 to gain a profit of $977,91. In other words, profit adds up to 43% of the funds enclosed. And at the same time, compare this process to the classical share purchase without leverage, where the trader would need to involve $22 090 to carry out an identical operation, and you should also take into account that the commission fee in this case will usually be much higher than in our Company.
CFD on exchange traded funds
Index investment is very popular in all countries with a developed stock market and the aim of this investment is to create a portfolio that will contain the majority or all the elements of the chosen index. For example, investment in NASDAQ100 index consists of the purchase of shares of 100 companies that are included into this index.
Work with the given instruments is becoming widespread due to flexibility, low cost and transparency of forecasting. Statistics collected during existence of indexes demonstrate that indexes not only possess greater stability, but also that their growth dynamics are frequently much better than of a separately taken share. On the other hand, such an investment scheme is rather expensive, as the purchase of even 100 different shares demands significant investments, and, frequently, buying one of each of 100 shares is not enough for the creation of a balanced and differentiated portfolio with the observance of a weight reference point among all shares included in an index.
The index investment fund, whose portfolio precisely corresponded to the S&P500 index and whose shares were freely traded on the stock exchange, first granted access to similar operations to a wide range of investors in 1993. Currently the exchange symbol of this fund’s shares is – SPY– and their cost makes 1/10 of S&P500 index. In 1997 followed the establishment of the Diamonds fund on the basis of the Dow Jones Industrial Index (symbol DIA, cost of share is 1/100 of index DJIA30 value) and in 1999 the Nasdaq-100 Trust was established (symbol QQQ, cost of share - 1/40 of NASDAQ100 value). The following names for the mentioned instruments are distributed among traders - cubes (QQQ), spiders (SPY), diamonds (DIA).
SPY - 1/10 S&P500 index;
DIA - 1/100 DJIA30 index;
QQQ - 1/40 NASDAQ100 index.
Detailed information regarding conditions for trading operations with CFD on shares in our Company could be found on the Contract specifications page.
USDX is one of the most interesting Forex financial instruments which allows not only to carry out trading operations, but also to forecast other currency pair rates.
Just as exchange indexes show the general state of the stock market, USDX shows the international value of USD. The index is calculated uninterruptedly 24/7 and is based on the information about operations on the financial market, provided by "Reuter" agency from 500 banks around the world.
The current value of USDX is a mean value of rate fluctuations of six world currencies (Japanese yen, Euro, British pound, Canadian dollar, Swiss franc and Swedish krona) with regard to the USD.
USDXt=50,14348112 x (EURt)–0,576 x (JPYt)0,136 x (GBPt)–0,119 x (CADt)0,091 x (SEKt)0,042 x (CHFt)0,036
USDX calculation according to six currency baskets is not accidental – it coincides with data used by the US Federal Reserve System during the calculation of trade weighted index regarding currencies of the countries which form the main US foreign trade turnover. The biggest part of US foreign trade falls to the EEA shares (57,6%), followed by Japan (13,6%), Great Britain (11.9%), Canada (9,1%), Sweden (4,2%) and Switzerland (3,6%).
From the mathematical point of view USDX is calculated as weighed geometrical mean fluctuation of six currencies against USD regarding March 1973 (introduction of floating rates system). USDX measures the dollar value reduced to 100,00, precisely to the price recorded in March 1973.
For example, quotation 90.75 means that USD value against the currency basket tumbled by 9.25% compared to March 1973. During its history period USDX reached the highest level of 165 and the lowest level of a little bit below 80.
In FOREX Ltd you may carry out operations with USDX on all account types.
You can experience in practice the advantages of running operations with USDX in FOREX Ltd right now. You just need to either open a demo account or open an account to proceed.
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