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In this video, we will understand the basic of currency and commodity trading.
To begin with, the Currency market is the largest trading market in the world where 5 trillion dollars are traded on a daily basis. The forex market comprises of investment firms, banks and forex brokers etc. The currency exchange takes place over the counter and the market is open throughout the day and 5 and a half days a week. Now here the currency exchange rate, the rate at which a single currency, can be exchanged for another is mentioned as pairs like the USD/CAD ie the US dollar and the Canadian Dollar. The exchange rate of these currency pairs is affected by its supply and demand in the international foreign exchange market.
There are 3 ways that trading is done in currencies- the spot market, the futures markets and the forward market. With the introduction of electronic trading and a plethora of brokers, there has been a huge surge in the spot market. Generally people refer to the spot market when currencies are bought and sold. The forward and the futures market are more popular with companies that need to hedge their foreign exchange risks.
To participate on the OCT one needs to have a physical exposure to a currency, but on futures platform there is now such restriction. So basically the benefit of dealing in the currency market is that it is highly liquid market wherein one can enter or exit anytime. A trader has the freedom to trade in as many lots as he wants. Also, it helps in making a diversified portfolio.
Next is the commodity market. Here the buying and selling of commodities take place. There are hard commodities and there are soft commodities. Hard commodities are those which need to be mined or extracted like gold. Soft commodities are the agricultural products like sugar, wheat, coffee etc.
Commodity trading like currencies can be traded in the futures market as well as the spot markets. Spot market is associated with real time prices. Commodities can also be traded in futures market. Here investors deal with contracts to buy and sell the commodity at a future date.
The most popular ways in dealing in commodities are Commodity futures, ETFs and mutual funds. These are basically the modern methods of dealing in commodities wherein the investors need not go for traditional buying and selling to deal in commodities, but to buy the respective ETFs or mutual funds of the companies that have underlying assets as commodities. These market instruments work on the performance of the underlying asset which can either be a single commodity or a group of commodities.
Both currency and commodity trading require extremely good knowledge of the global markets and how will that affect the investors trading strategy.
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