On the forex market individuals and firms buy and sell foreign currency. Some firms and individuals buy forex for using in the procurement of goods and services from other countries. For instance a Zimbabwean firm could buy United States dollars to procure cholera drugs. However most of the popular players on the foreign exchange market are individuals and firms who buy foreign currency for speculative reasons anticipating to make a profit from the fall or gain in value of a certain currency.
The buying and selling of currencies on the forex market goes as follows: The currencies are always priced in pairs. One currency is the base currency whilst the other currency is referred to as the quote currency. More often than not, the United States dollar is usually expressed as the base currency. An example of currency pairs is USD/ZWD, USD/GBP, USD/JPY.
Every transaction always involves the sale of one currency and another being bought. Forex traders usually buy a currency on the forex market anticipating that it will increase in value with respect to the one being sold. When the anticipation or speculation fulfills the trader then sells the other currency back as a way to lock in some profit. The trader may lose if his anticipation does not fulfill according to their expectations though.
It is also very important that a trader on the market makes some deposit into their account to cover up for unanticipated losses that may occur in the future. This helps to keep the trader in business even after incurring some heavy losses.
Quotations on the forex market always include a bid price then an ask price. The bid price refers to the price at which the market maker wishes to buy the base currency whilst the ask price refers to that price at which market maker is wishing to sell the base currency for the counter currency! The term spread is used to refer to the difference between the ask price and bid price.
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