What is Spot Forex
Spot Forex trading occupies one third chunk of the mammoth foreign exchange buying and selling being pulled off across the globe. It is constituted of two tiers. Two day delivery time is imposed by this forex market to accommodate the movement of cash through the trading banks.
First of the two tiers of the trading is interbank market. Here the buying and selling of foreign currencies for settlement and delivery is done within a maximum of two days and the participating banks act as wholesalers. The second tier is the speculative retail market which is suffused with private traders who carry out their business through the internet or over telephone with the aid of brokers.
The spot forex market does not have a centralized exchange in the line of stock exchanges with the entire trade being done over the counter. The currency exchange rates are noted down to four decimal places except yen.
Bid offer spread in the spot forex market is the difference between the ask price (price at which currencies are bought) and the bid or selling price. The spread is denoted in the format of GBP/USD = 1.6240/45 which indicates that the GBP has a bid price of 1.6240 USD against the ask price of 1.6245 with a spread of 5 points.
The pairings done with American dollar are called majors. Cross refers to the pairing made between non US currencies, but the consistency of exchange rates is maintained across all pairs in spot forex trading.
The fundamental trading unit in spot forex exchange is called a ‘lot’, which essentially is made up of 100000 base currency units. Retail investors are not required to deposit the entire lot to execute a trade. The buyer needs to deposit a ‘margin’ which will enable the investor in gearing up the trade’s magnitude to institutional level.
The underlying trade’s value customarily determines the margin in spot forex trade and it hovers around 1-5% of the value. The denomination of currency is a function of the brokerage through which the trade is executed.
Purchasing a currency means being ‘long’ in that currency whereas selling a currency means being ‘short’ in spot forex trade. An ongoing trade is indicated by open position in spot forex, wherein the value fluctuation will occur as per prevailing market exchange rates. Opposite and equal trade is to be conducted in the same currency group to ‘close out’ the open position in spot forex trade.