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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Stocks, futures, and options exchanges are businessesProcessing Your Trade Most investors never realize the number of steps required for a trade to occur and the incredible speed involved. Technology has made this process almost unnoticeable to the average investor. When you contact your stock or futures broker, you begin a process that, in many cases, can be completed in 10 seconds or less, depending on the type of trade you want to execute. There are various types of orders that are placed between customers and brokerage firms. The faster technology becomes, the faster a traders order gets filled. Lets take a closer look at what happens when you place an order. EXCHANGES Stocks, futures, and options are traded on organized exchanges throughout the world, 24 hours a day. These exchanges establish rules and procedures that foster a safe and fair method of determining the price of a security. They also provide an arena for the trading of securities. Over the years, the various exchanges have had to update themselves with the everincreasing demands made by huge increases in trading volume. The New York Stock Exchange (NYSE)probably the best known of the exchangesnot too long ago traded 100 million shares as a high. Today we see 700, 800, 900 million, and even 1 billion shares trading in a day. Stocks, futures, and options exchanges are businesses. They provide the public with a place to trade. Each exchange has a unique personality and competes with other exchanges for business. This competitiveness keeps the exchanges on their toes. Exchanges sell memberships on the exchange floor to brokerage firms and specialists. They must be able to react to the demands of the marketplace with innovative products, services, and technological innovations. If everyone does his or her job, then you wont even know where your trade was executed. In addition, exchanges all over the world are linked together regardless of different time zones. Prices shift as trading ends in one time zone, moving activity to the next. This global dynamic explains why shares close at one price and open the next day at a completely different price at the same exchange. With the increased use of electronic trading in global markets, these price movements are more unpredictable than ever before. The primary U.S. stock exchanges are the New York Stock Exchange, the American Stock Exchange (Amex), and Nasdaq. There is a host of others that do not get as much publicity as the big three. However, each exchange certainly produces its share of activity. These include the Pacific Exchange in San Francisco, the Chicago Stock Exchange, the Boston Stock Exchange, and the Philadelphia Stock Exchange. The major international exchanges are in Tokyo, London, Frankfurt, Johannesburg, Sydney, Hong Kong, and Singapore. The primary commodities exchanges include: Chicago Mercantile Exchange (CME); Chicago Board of Trade (CBOT); New York Mercantile Exchange (NYMEX); COMEX (New York); Kansas City Board of Trade; Coffee, Cocoa and Sugar Exchange (New York); and the Commodity Exchange (CEC). The Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) currently regulate the nations commodity futures industry. Created by the Commodity Futures Trading Commission Act of 1974, the CFTC has five futures markets commissioners who are appointed by the U.S. President and subject to Senate approval. The rules of the SEC and the CFTC differ in some areas, but their goals remain similar. They are both charged with ensuring the open and efficient operation of exchanges. EXPLORING THE FOREX The term FOREX is derived from foreign exchange and is the largest financial market in the world. Unlike most markets, the FOREX market is open 24 hours per day and has an estimated 1.2 trillion in turnover every day. The FOREX market does not have a fixed exchange. It is primarily traded through banks, brokers, dealers, financial institutions, and private individuals. A common term in the FOREX arena you will run into is Interbank. Originally this was just banks and large institutions exchanging information about the current rate at which their clients or themselves were prepared to buy or sell a currency. Now it means anyone who is prepared to buy or sell a currency. It could be two individuals or your local travel agent offering to exchange euros for U.S. dollars. However, you will find that most of the brokers and banks use centralized feeds to ensure the reliability of a quote. The quotes for bid (buy) and offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This ensures that if they place an order on your behalf that the institutions they have placed the order with are capable of fulfilling the order. Just as with other securities on other exchanges, you will see two numbers. The first number is called the bid and the second number is called the ask. For example, using the euro against the U.S. dollar you might see 0.9550/0.9955. The first number is the bid price and is the price at which traders are prepared to buy euros against the U.S. dollar. Spot or cash market FOREX is traditionally traded in lots, also referred to as contracts. The standard size for a lot is $100,000. In the past few years, a mini-lot size has been introduced of $10,000 and this again may change in the years to come. They are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments it is desirable to trade large amounts of a particular currency in order to see any significant profit or loss. Leverage financed with credit, such as that purchased on a margin account, is very common in FOREX. A margined account is a leverageable account in which FOREX can be purchased for a combination of cash or collateral depending what your broker will accept. The loan in the margined account is collateralized by your initial margin or deposit. If the value of the trade drops sufficiently, the broker will ask you to either put in more cash, sell a portion of your position, or even close your position. Margin rules may be regulated in some countries, but margin requirements and interest vary among broker/dealers; so always check with the company you are dealing with to ensure you understand its policy. Although the movement today is toward all transactions eventually finishing with a profit or loss in U.S. dollars, it is important to realize that your profit or loss may not actually be in U.S. dollars. This trend toward U.S. dollars is more pronounced in the United States, as you would expect. Most U.S.-based traders assume they will see their balance at the end of each day in U.S. dollars Preferably you want a company that is regulated in the country in which it operates, is insured or bonded, and has an excellent track record. As a rule of thumb, nearly all countries have some kind of regulatory authority that will be able to advise you. Most of the regulatory authorities will have a list of brokers who fall within their jurisdiction and may provide you with a list. They probably will not tell you who to use but at least if the list came from them, you can have some confidence in those companies. Just as with a bank, you are entitled to interest on the money you have on deposit. Some brokers may stipulate that interest is payable only on accounts over a certain amount, but the trend today is that you will earn interest on any amount you have that is not being used to cover your margin. Your broker is probably not the most competitive place to earn interest, but that should not be the point of having your money with them in the first place. Payment on the portion of your account that is not being used, and segregation of funds all go to show the reputability of the company you are dealing with. Policies that are implemented by governments and central banks can play a major role in the FOREX market. Central banks can play an important part in controlling the countrys money supply to ensure financial stability. A large part of FOREX turnover is from banks. Large banks can literally trade billions of dollars daily. This can take the form of a service to their customers, or they themselves might speculate on the FOREX market. The FOREX market can be extremely liquid, which is why it can be desirable to trade. Hedge funds have increasingly allocated portions of their portfolios to speculate on the FOREX market. Another advantage hedge funds can utilize is a much higher degree of leverage than would typically be found in the equity markets. The FOREX market mainstay is that of international trade. Many companies have to import or export goods to different countries all around the world. Payment for these goods and services may be made and received in different currencies. Many billions of dollars are exchanged daily to facilitate trade. The timing of those transactions can dramatically affect a companys balance sheet. Although you may not think it, the man in the street also plays a part in todays FOREX world. Every time he goes on holiday overseas he normally needs to purchase that countrys currency and again change it back into his own currency once he returns. Unwittingly, he is in fact trading currencies. He may also purchase goods and services while overseas and his credit card company has to convert those sales back into his base currency in order to charge him. The key impression I would like to leave you with about the FOREX is that it is more than the combined turnover of all the worlds stock markets on any given day. This makes it a very liquid market and thus an extremely attractive market to trade. |
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