The Basics of Forex Business

Even though Forex or Foreign Exchange is an established business, it has recently gained popularity as an online business. Before you move and venture into this online business, it is better to take a look at the business and understand what it is all about.

Forex or Foreign Exchange is traditionally a Bank's business which is drives by international trade or business. For example, when an importer of a product from Italy wants to pay their supplier in the USA, the supplier may want the payment to be made in US Dollar. The importer has to buy the US Dollar from the Bank and pay the Bank in Euro. There are billions worth of such cross border transactions daily and these drive the value of the world currencies up and down. Like stock market, the prices will be higher when there are more demands for a particular currencies.

To know forex, you will also need to know how the Bank works. Let's continue from the example of the importer from Italy who wants to pay in US Dollar. When the Banks received the payment in Euro, as instructed by the importer, the Bank needs to send US Dollar to the US. How does the Bank send the money?

The money will be send through an appointed Bank or agent in the USA. Whenever there is an instruction to pay, the Bank will send a telex or SWIFT message to the counterparty or agent bank to pay the supplier on their behalf. Most of international payment is done via SWIFT, an organization that most of the Banks in the world are a member of.

When a customer of the Bank wants to buy a particular currency, a Bank Sell price is quoted by the Bank's dealer to the customer. The price quoted is actually above the market rate and the Bank made a profit right away. After a confirmed deal with the customer, the Bank will go to the interbank market and buy the currency for the customer.

Apart from the customer link transactions, Banks will also go into the interbank market by itself to trade forex with their own funds. This is the actual forex trading business and profit is not guaranteed. By doing trading, Banks go into the market to buy or sell purely based on speculations and make profit from it.

When compared to the squaring of customers bookings, Forex trading is a little bit more difficult to earn as you need to know where the market is moving and the margin might be very thin. You will need to know when to buy and when to sell, buy at a low and sell at high.

When Banks quoted their forex prices, they will normally term it as Bid and Offer where Bid is the price they are willing to pay and Offer is the price they are willing to accept. For example, on 26 May 2010, for Euro Dollar rates, the Bank Bid price is 1.2305 and the Bank Offer price is 1.2326. The meaning of this is that the Bank will pay US Dollar 1.2305 for 1 Euro and receive US Dollar 1.2326 for 1 Euro.

So, if you buy 100,000 Euro then you have to pay 123,260 US Dollar and if you sell 100,000 Euro then you'll get 123,050 US Dollar. If you buy 100,000 Euro and sell it right away, you'll loose 210 Euro. The Bank won't do that. They will wait for the Bid price to move to the level higher than 1.2326 in order to make money.

In order to make money in the Forex Business, you'll need to have the technical knowledge of the business and how it works. You'll also need to keep abreast of what's going on in the market as well as views of the economy. To a laymen like us, it's quite a far reaching feat.