Earlier in Singapore, it was possible to trade only for the separate entities and big corporations.
Modern technology and improved tools allow trading with forex to every retail trader as well. In fact, any citizen who has reached a legal age can try. There are two main purposes of this activity in Singapore:
- Hedging
- Speculations
Before moving to the main part of our article, let us briefly define forex trading. This term stands for trading (purchasing/selling) world’s currencies. When it is said that Eurusd is trading at 1,35, they mean 1 Euro is worth 1,25 USD. That’s why in case one is interested in longing the Eurusd, it is necessary to purchase 1 Euro and sell 1,35 USD instead. But don’t think that it’s that easy to become rich all of the sudden thanks to the forex brokers. Read 5 fundamental things every trader should know before getting started in Singapore.
1. Transaction Cost
Have you ever traded stocks before? If yes, you may know that there is a certain commission along with the extension on it. Such spread is the gap between the bid and offer. Whenever you decide to purchase Keppel Corp with the $11.20 quotes, you will deal with an offer. When selling the same stock and still being quoted $11.10, you work with the bid. Thus, the spread is $0.10 per this company.
There are two transaction costs to cover: commission and the spread. As for trading activity, the player is given a single transaction cost to cover. It is known as the spread. No commission is taken except for the case when you trade on ECN. Thus, forex trading comes along with lower transaction cost in contrast to stock trading.
2. Forget about the Physical
Buying stocks actually means that you become a part owner of the company. The shares belong to you and give you certain rights. You are trading in the spot market. This sort of activity involves no delivery of the currencies. If you want some, try joining the futures market.
The orders you make are automatically recorded by the personal broker who serves as a manager. Thus, you’ll see all profits and losses with respect to the existing market price. There is one formula which always works: when earning profits, the equity is added respectively. In the case of losses, equity is reduced the same level.
3. Leverage Tool
Forex trading is a leveraged tool. A broker who proposes 1:100 is not something unusual. In other words, in case you decide to deposit $100, you can make it through to $10000.
However, leverage has two sides of the coin. The first scenario involves raising your revenues; the second is about amplifying losses. When some traders leverage to relative to the account volume, a tiny change in price may wipe out the entire trading capital. Thus, you have to be really careful with these movements.
4. Carry Trade
A positive carry trade means that the currency you are long leads to the higher interest rate. Let’s look at the example. You are long Audjpy: you purchase the Aussie and offer the Yen. Aussie offers an interest of around 3% annually while the Yen offers 0%.
Borrowing the Yen and depositing it in the Aussie pays 3% annually. Does it mean free money for you? Well, you still face a currency threat as far as Aussie can depreciate more than 3% against the Yen. Thus, you may lose your capital.
5. Not Exchange Traded
You have to memorize that forex trading is traded over the counter which means a chance of counterparty threat and consequences. Such risk is often associated with the broker. You have to choose one attentively.
You won’t be able to achieve even the level of the interbank market as your transaction size is too small. In the majority of the cases, your broker will appear on the opposite side of the trade. He will simply pool the retail orders and hedge them on the interbank market. Banks and different institutions would then be able to trade with each other.
When the broker does not manage to hedge before the changes in price, both of you risk going bankrupt. You may watch a bad example provided by SNB not long ago. FXCM and Alpari led to significant losses.
Ready to Trade?