FOREX currencies are traded in much smaller divisions than cash. Whereas the smallest division in US cash is the penny ($0.01), US currency can be traded on the FOREX in divisions of $0.0001. This smallest division is called the pip (short for Price Interest Point sometimes just called 'points').
Since currencies are traded in large lots of (say) $100,000 - small movements in value can generate substantial profits and losses. In a lot of US$100,000 one pip is worth $10 so an increase in 40 pips (4/10 of one cent) can generate a profit or loss of $400.
Currencies are traded in lots of various sizes. The standard lot is 100,000 units of the base currency. A unit is the currency name e.g. one unit of US dollars is the dollar. So a standard lot of US currency is worth $100,000. FOREX trades can have lots of various sizes - a mini lot is 10,000 units, but the most trades are done using standard lots.
A currency option is a contract that gives the holder the right, but not the obligation to buy or sell a specified currency during a specific time period. It can be used to hedge a FOREX transaction and are a favored method of reducing risk in companies that trade goods overseas.
There are two basic types of option: Call options and Put options. A call option gives the holder the right to buy a currency while a put option gives the holder the right to sell. The worth of an option at expiry is equal to the value realized by the holder in exercising the option. If the holder gains nothing, the option is worth nothing.
Intrinsic value is linked to the 'strike price' - the value specified by the option contract. A call option has intrinsic value if the spot (current) price is above the strike price. A put option has intrinsic value if the spot price is below the strike price. If the option contract has intrinsic value it is said to be 'in the money', otherwise it is 'out of the money' or 'at the money' (at par). Options would only be exercised if they are in the money.
Stocks have been a popular investment for hundreds of years. Companies issue stocks to raise capital for expansion and new projects, and each share of the stock represents a partial ownership in the company. When the company does well and makes a profit, the value of the stocks will rise.
Stock owners can sell their shares for a profit or hold on to the stock for even more gain in the future. Sometimes companies will issue dividends part of the profits that are distributed to share holders.
Stocks are traded on stock exchanges. Most stocks are bought and sold through brokers who charge a commission or fee for this service. American stock exchanges include the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ). Most stocks are only listed on one exchange, although large companies may have listings on several exchanges.
Stocks were traditionally seen as long term investments. So called 'blue chip' stocks - those having proven value over many years - may form the backbone of an investment portfolio. Short term trading is a relatively new phenomenon made possible with the advent of Internet trading. Day traders attempt to take advantage of large daily fluctuations in the market by buying and selling many times in one trading period. It is relatively risky and any profits realized are reduced by broker commissions charged on each transaction.
FOREX trading software needs to access real-time quotes and offer a means to enter and exit the market. Even the most basic packages offer these functions. Current quotes can be seen for most currency pairs and the software allows you to buy or sell at market prices or enter and exit the market using stops or limits. Ideally, trading software should have integrated charting functions with a variety of viewing functions.
Basic software packages should be offered free of charge, but many brokers also have more advanced packages available for a monthly fee. Some of the features you could expect to see in advanced software include the ability to trade directly from the chart and full analytical functions.
Every online FOREX broker has a FOREX trading system for their clients to make transactions and get information about market prices. All FOREX software needs to provide up-to-the-second market information. The fast moving pace of the FOREX demands real-time data delivery for making decisions about when to enter and exit the market.
Internet connection speed and distance from the broker's servers are the two main factors that can slow down data transmission. FOREX traders should have a reasonably modern computer and a high speed Internet connection to take full advantage of the FOREX currency trading system offered by their broker. It may also pay to choose a broker in the same area as you live.
