Share Market

Before you attempt to trade currencies, you should have a firm understanding of currency quoting conventions, how forex transactions are priced, and the mathematical formulae required to convert one currency into another.

Currency exchange rates are usually quoted using a pair of prices representing a “bid” and an “ask.” Similar to the manner in which stocks might be quoted, the “ask” is a price that represents how much you will need to spend in order to purchase a currency, and the “bid” is a price that represents the (lower) amount that you will receive if you sell the currency. The difference between the bid and ask prices is known as the “bid-ask spread,” and it represents an inherent cost of trading the wider the bid-ask spread, the more it costs to buy and sell a given currency, apart from any other commissions or transaction charges.

Generally speaking, there are three ways to trade foreign currency exchange rates:

1. On an exchange that is regulated by the Commodity Futures Trading Commission

(CFTC). An example of such an exchange is the Chicago Mercantile Exchange, which offers currency futures and options on currency futures products. Exchange-traded currency futures and options provide traders with contracts of a set unit size, a fixed expiration date, and centralized clearing. In centralized clearing, a clearing corporation acts as single counterparty to every transaction and guarantees the completion and credit worthiness of all transactions.

2. On an exchange that is regulated by the Securities and Exchange Commission (SEC).

An example of such an exchange is the NASDAQ OMX PHLX (formerly the Philadelphia Stock Exchange), which offers options on currencies (i.e., the right but not the obligation to buy or sell a currency at a specific rate within a specified time).

3. In the off-exchange market.

In the off-exchange market (sometimes called the over-thecounter, or OTC, market), an individual investor trades directly with a counterparty, such as a forex broker or dealer; there is no exchange or central clearinghouse. Instead, the trading generally is conducted by telephone or through electronic communications networks (ECNs).