There are many times in life when you can shop for everything you need under one
roof, but this rarely happens if you want your broker to handle both stocks and foreign
exchange for you. Perhaps, a bank can direct you to two different departments, or a
stockbroker can help you with a currency ETF or with the futures market, but if you want
to trade retail forex, then you invariably must find a forex broker equipped for the task.
Why is this the case? The unique access required for equity markets versus those for
securing currency pairs is the overriding factor. Stocks will typically trade on a formal
exchange where orders from buyers and sellers can be matched either physically on
a trading floor or by electronic methods following some adopted formula for handling
the transaction. The issue here is that the investor is taking title to a physical asset or a
security that necessitates a legal contract. This contract defines how ownership will be
transferred, recorded, and paid for in funds that must move between brokers, if more
than one broker is involved.
In the retail forex world, the investor or trader never takes possession of the physical
currency. He is primarily speculating on the movements in value in the market and trying
to profit off these same moves by buying a position from his forex broker. Currencies
come in pairs and have no intrinsic value. They are traded on an informal, global market
comprised of major banks and financial institutions in support of international trade and
commerce. Reuters and EBS provide the electronic platform for this Interbank market,
and forex brokers contract directly with these firms for their access.
When you buy or sell a share of stock, the broker’s job is to match your order with
another, but if there are no buyers or sellers, specifically designated brokers must step
in and be what is called a “market maker”, the buyer or seller of last resort. They are
required by their exchange to perform this function in order that liquidity always exists
for the stock. Market makers may accumulate inventories of less-traded issues, but then
unload them over time, causing unwanted dips in market valuations. Some analysts
have pointed to this practice as a viable reason for investors moving to currencies.
Our currency markets are the largest and most liquid in the world, accounting for in
excess of $4 trillion in volume, each and every business day around the globe. Even
central banks have difficulty manipulating this market, the reason most people regard
forex as the purest trading medium on record. Forex brokers gain access through
participants in the Interbank market, aggregate their trading exposures, and manage
the overall risk of the total volume of their retail clients. (You may review various forex
brokers by viewing this link from forextraders.com.)
Forex brokers are also able to offer leverage, the ability to acquire a position of up
to 50 times the size of your forex bet. Margin accounts in the stock world are mere
percentages of your total account balance, and interest is charged for the privilege.
Leverage is free, due the larger spread amount collected by the broker. Leverage can
multiply potential gains, such that 20 to 30 basis point price movements can be highly
profitable, but the practice can magnify losses, as well. Caution is advised.
Skill sets and operating standards have also contributed to further separation, but the
nature of market access and mitigating the extenuating risks, which are much higher in
the forex world, has primarily forced brokers to specialize.
Be the first to comment