Whether you’re a seasoned investor or merely someone who just wants to make sure to get a good exchange rate when you make an international money transfer, FX trading is a relatively new and exciting form of trading that’s drawing investors from all over the world. The foreign exchange market is the largest and most fluid in the world, offering 24-hours-a-day trading that’s appealing to all levels of investors.
Before you start closely watching online publications and those market fluctuations, however, it will be helpful to know some of the jargon that’s commonly used by investors. Read on the learn some common terms that will help you better understand FX trading before you start investing your money.
FX trading, or Forex trading, is the trading of world currencies on the foreign exchange market. The foreign exchange market is a little bit different from other large markets, like stock markets, in that it doesn’t have any physical trading floors. Instead, trades happen online. That makes it the most fluid market in the world. Because of the constant demand for currency exchange, it’s also the largest market in the world, trading 24 hours a day, five and a half days a week, in major financial hubs in almost every time zone: London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.
Since businesses and individuals need to exchange currencies almost constantly, the foreign exchange market trades more than the equivalent of $4.9 trillion US dollars each day.
Unlike what you may think, a bid is not the price you’re willing to pay for a currency. Bids and asks are from a broker’s perspective, not yours. The bid is what the seller might be willing to give you if you were selling the currency.
The ask is the broker’s asking price for the currency, which is usually a small fraction of a unit higher than the bid.
In FX trading, the bid-ask spread will be written as a quote that shows the value between 2 currencies. For example, if a trader wants to determine the exchange rate and the bid-ask spread between the US dollar (USD) and the Japanese yen (JPY), a quote might look like this:
USD/JPY = 119.50/119.55
This quote means that US$1 = 119.50 to 119.55 Japanese yen.
- The first amount is the bid. In this case, a broker would be willing to pay you 119.50 Japanese Yen for 1 US dollar.
- The second price is the ask. Which would mean the broker wants 119.55 Yen for 1 dollar.
There are a number of factors that help determine what the bid-ask spread of a currency may be. Probably the most important is the trading volume of the currency. If it has a high trading volume, meaning lots of people are looking to buy and sell the currency, there will be less of a difference between the bid and the ask. This is because if many traders are trying to sell the currency, they’ll accept lower bids, while if many people are trying to buy it, they’ll pay higher asks.
Another factor that can determine the spread between the bid and ask of a currency is uncertainty in its home country. Investors don’t like uncertainty, so things like important elections and changing economic policy in a country can increase the bid-ask spread of its currency.
Exchange rates change constantly throughout the day, and while some sites may only update once a day, others, like XE, update frequently. This means you may see different prices listed on different sites. There are also differences in how sites publish prices for currencies. Some may publish the bid, while others publish the ask, and others may publish the mid-market rate or spot rate, which is the average of the two. It’s important to check multiple resources to ensure you have a good idea of the mid-market rate, the ask and the bid for a currency, giving you a better picture of its overall value.
Not only that, but sites like XE and Reuters may even be pulling their quotes from different markets. So, for example, XE may pull prices on INR from London and New York, but Reuters may pull prices on INR from Calcutta and Singapore. Which would mean that the two sites may not always match, depending on where their numbers are sourced from.
The mid-market rate, interbank rate and spot rate are all the same thing: The midpoint between the bid and ask for a given currency. They represent the “real” exchange rate for the currency, which is what you’ll see if you just google it.
When buying currency, you want to look for an exchange rate as close to the mid-market rate as possible, because that means you’re getting a good deal on your buy. When selling, you want to quote an exchange rate a little higher than the mid-market rate to get more money for the currency you’re selling. In other words, your ask should be higher than your bid.
The short answer is that banks choose their own exchange rates. Banks are generally not the most favorable places to exchange currencies, as they tend to do so at an exchange rate that is much higher than the mid-market rate, allowing them to make a profit on the exchange. Many banks even write out online the fact that they don’t offer spot rates to consumers, but it’s only available to customers with very large amounts of money.
If you’re looking to send money abroad regularly, you might consider a TransferWise multi-currency borderless account. It’s free to sign up, and once you go through your one-time verification process, it allows users to hold, send and manage money in dozens of different currencies all at once. Most traditional bank accounts only allow their users to keep 1-2 currencies at a time, which can mean losing money on exchange rates when you convert foreign currencies. A TransferWise borderless account can solve that problem. Check out a breakdown of borderless account pricing.
Whether you’re already following the market closely or just want to make sure find the best time to send money abroad, you’ll want to stay on top of the current exchange rates to compare to quotes, ensuring that you’re getting the best deals on the FX market. If you want to keep a close eye on rates, signing up for a tool like TransferWise rate alerts can help.
If you’re ready, see how to get started with TransferWise today. Good luck!
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