How I Came To Know Forex Market

The moment we are born into this world, we embark on a lifelong journey of learning. We start out learning such basic things as walking and talking. A few years later we enter school, where we take on alphabet, writing, reading, as well as socializing, etc. In fact, many think that learning stops after school or college, but actually in our reality it doesn’t since each day we learn something new  and this process of learning goes on and on till the end of our journey. On each step of our lives we come across with new phenomena that need to be discovered. Such phenomenon for me appeared to be Forex market.

Let me clarify in some words what Forex is. Forex stands for the Foreign Exchange market, which is one of the largest and the most popular financial markets in the world, with an average daily turnover of $5 trillion. In fact, the Foreign Exchange is an international currency market, where people from all over the world exchange the currency of one country for the currency of another country. The Foreign Exchange market operates 24 hours a day, 5 days a week (from Monday to Friday) giving traders the opportunity of generating a large amount of money on the price changes of various currencies.

Why did I make my mind to learn more about Forex market? Well, a friend of mine works at a Forex Brokerage Company.  Every time we meet we start discussing a lot of things concerning our lives, except work. But once during one of our meetings I saw a book in her bag. And as I love reading a lot, I became curious. That was a tutorial, a forex tutorial. She advised me to read it. I've never heard about Forex before. I started reading. The more I read the more Forex attracted me. I embarked on searching for new articles, new Forex books. I got registered in different forums where people were discussing Forex trading and became one of the active members. I was really satisfied with the fact that I managed to discover a new sphere for me. And what is the most important, you don’t have to be a trader for getting involved in Forex.

You may ask “what are the benefits of learning Forex if you don’t trade”?

Well, I’ll just bring examples from my own experience. I’ve never liked risky businesses and Forex is considered to be a risky business. But that idea didn't make me give up on my decision of enlarging my knowledge on forex. The detailed examination of Forex gave me the opportunity to enter the world of finance. I found out a lot of new facts, words, types of contracts, learned names of some indexes, I'd never heard before like CFD (contract for differences), Futures, S&P 500, CAC 40, etc. I learned what factors may affect financial markets such as political, economical, cultural, etc. With the help of Forex I developed my analytical skills as well as my logic. Generally, as you see, I only gained from Forex.  My knowledge on Forex is one of the best achievements of my life.

To sum up with, I'd like to advise everyone to enlarge their knowledge as much as they can on any aspect of life. It's the only thing that will never do you any harm!

What is a Prime Broker?

A prime broker is usually a large bank or an investment company providing a wide range of services to hedge funds related to clearing, operational support, settlement of transactions and risk management. A brokerage company, a trading office, an operational office and a managing company, which help hedge funds to solve various tasks, are included in the structure of a prime broker.

Development of a prime-brokerage

The prime brokerage service originated in the 1970s due to the rapid development of hedge funds. Large investment banks started to offer their services to hedge funds for a certain fee: credits on favorable terms, technical support, accounting services and research, and they also found major investors. Since the middle of the 2000s, the popularity of prime-brokerage services began to decline, and during the global financial crisis of 2008, their number sharply decreased following the decline in the number of hedge funds and assets under their control.
After the bankruptcy of the largest US investment bank Lehman Brothers, hedge funds, which received margin financing from the bank, could not retrieve their assets transferred to the bank as collateral. Credit ratings of many prime brokers were also reduced during the crisis, and hedge funds began to move to banks with the best credit rating, because when making transactions on behalf of the prime broker, the high rating of the company was of a great importance. After the crisis, hedge funds, which were using the services of one prime broker, started to use services of several companies for risk diversification.
In addition, prime brokers’ requirements for the provision of loans received by hedge funds increased: 30-40% of the capital in case of trading high-yield bonds instead of 10-15%.

Forex prime brokers

Forex prime brokers are high liquidity providers - the largest banks known across the world: Bank of America, Barclays Capital, Morgan Stanley, Deutsche Bank and others.
Forex prime brokers make transactions on behalf of and at the expense of smaller banks and brokers and act as their guarantor in the interbank market, because a brokerage company and particularly a private investor cannot make large transactions independently. After making a deal with a client, the prime broker automatically makes the opposite transaction in the interbank market to prevent risks of the parties.

Only those Forex brokerage companies that work maximally transparent and have a license from reputable regulators, may enter into an agreement with a prime broker and take clients’ deals to the interbank market.

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Stock indices trading

Stock indices are one of the best instruments for trading on financial markets and the best way to diversify risks.

Stock index is an indicator of the state and dynamics of the securities market, which is calculated on the basis of the most liquid stock prices. Indices of various countries reflect the state of the most developed sectors and are indicators of national economies.

The formation of a stock index

In 1884 Charles Dow, the founder of the financial journal “The Wall Street Journal”, offered investors a kind of indicator of the overall market state, and not a specific stock. That was the first stock index called the Dow Jones Transportation Average.

The index was calculated on the basis of stock prices of 11 largest transportation companies in the US. Currently, the oldest of the existing indices is formed on the basis of stock prices of 20 transportation corporations.

The Dow Jones Industrial Average appeared in 1896. The index was equal to the arithmetic average of stock prices of 12 industrial companies in the US, which was nearly $70. Now it includes 30 largest companies in the US – approximately $180000.

The calculation of a stock index

The calculation of stock indices is made according to two main methods:

Price weighted – at the closing moment of trades, quotations of all stocks included in the index are added up and divided by a so-called divisor, the value of which changes when adding or excluding stocks of various companies. Dow Jones indices are calculated according to this method, which is considered to be their main disadvantage, because they do not take into account capitalization of companies included in the index.

Capitalization weighted – the weight of each company included in the index is proportionate to its market capitalization. In other words, the larger the company, the stronger its impact on the index. The most popular index calculated through this method is S&P 500 (includes the 500 largest US companies by market capitalization), which is the barometer of the US economy.

The peculiarities of trading stock indices

The changes in index over time allows not only to analyze the overall state and direction of the market, but also to make money on trends. It is impossible to trade the index itself. Thus, transactions on direct purchase/sale are made through standardized futures. By purchasing or selling index futures, parties bet on change in underlying indictor. Inother words, by opening a long or a short position on this futures, a trader conditionally buys or sells shares of companies included in the index.

Stock indices trading is also carried out through stock index CFDs, the price of which is determined by the values of relevant indexes or futures. The main advantage of trading CFDs on indices is the opportunity to trade with fractional lots and invest a small amount of money using leverage.