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Why people TRADE?

Why do people trade? To make money and just to make more money, or you could also say to try that they don't lose money. It can be classified in just three simple reasons:

Hedging: Hedging means attempt to mitigate/minimize/offset your risk. When someone tries to get in to a future agreement/contract or do a trade so as he can try to possibly reduce his risk (of losing money due to change in market value). The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another. Technically, to hedge you would invest in two securities with negative correlations. Hedging techniques generally involve the use of complicated financial instruments known as derivatives, the most common of which are Forwards, Futures, Options & Swaps. An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.

Speculation: Speculation is like inverse of hedging, the process of selecting investments with higher risk in order to profit from an anticipated price movement. A speculator generally tries to take advantage of another speculator or a hedger by getting into a deal/trade contract with him for future, as he is hoping that the other party would probably be wrong about future so the contract will turn in his favor. Financial speculation involves the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives, or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.

Arbitrage: The simultaneous purchase and sale of an asset in order to profit from a difference in the price. Arbitrage is the practice of taking advantage of a price differential between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, and buy the undervalued shares on one exchange while short selling the same number of overvalued shares on another exchange, thus capturing risk-free profits as the prices on the two exchanges converge. Arbitrageurs also play an important role in the operation of capital markets, as their efforts in exploiting price inefficiencies keep prices more accurate than they otherwise would be.

(To read more go to wikipedia or investopedia. You may also read & enjoy my personal-blog here)

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Forex Review

What is Forex? Forex is an abbreviation of Foreign Exchange (also referred to as FX) and it is the largest financial market in the world. The Forex market is the place where currencies are traded (currencies are money that is used as an exchange medium). In other words, it is the place where currencies are being sold and bought. In the Forex market all currencies are traded in real time. Trading with currencies always means that there are two simultaneous transactions taking place. If a currency is being bought, it is also being sold. To better understand this notion, think of currencies as both the goods you are buying AND the method with which you're paying for the goods.

Since the Forex market is the place where currencies are traded in real time, people may trade one currency for another and make a profit off of this transaction. Profits are made when one is able to determine which currency's value will increase by the end of a pre-determined time period (such time periods may be short or long). The Forex market is open 24 hours a day, five days a week and it is based in four major cities: New York, London, Sydney, and Tokyo. The Forex market is open to individuals over the age of eighteen. While Forex trading may sound daunting, it really isn’t. It can be easily comprehended and understood without prior experience in finance or economy. It is challenging and exciting, thought provoking and manageable, stimulating and filled with opportunities.

Some Forex Basics:
• The first currency listed in a currency pair is called the "base currency".
• The “base currency” is usually the U.S. Dollar. Traders will generally trade the U.S. Dollar against another currency, which is called the “counter currency”.
• Currencies are quoted in pairs. For example: The pair U.S. Dollar and JPY will be quoted in the following way: USD/JPY equals to 2.5 (This means that 1 U.S. Dollar can buy 2.5 JPY).
• When a quote increases, it means that the “base currency” has risen in value and the “counter currency” has weakened in value. For example: If the USD/JPY quote used to be equal to 2.5 but is now equal to 2.6, then this means that the dollar has strengthened (because 1 U.S. Dollar can now buy 2.6 JPY as opposed to the mere 2.5 JPY it could buy beforehand.)

(To read more click here. You may also read & enjoy my personal-blog here)