Some questions about how trading works

Hi everybody,

I have some new questions and I can not find an exausting answer for them, so I ask you some help.

  1. Forex is a CFD market or not? If not, what is the kind of market of forex?

  2. The CFDs let us trade (for example) oil or gold, without having real gold or oil. So, the money that we invest with a broker, take part of the real price generations of the market or they stay in the broker pocket?

  3. I can realize, in my mind, what is the utility of a market like forex (internationals commercial exchanges etc …), but I can not realize what is the function of online trading in the system. I mean: the forex trading is only a speculative system that exists between us and brokers, or has a real and practice utility in the system?

Thank you

Hi Ser_J

  1. The FX markets are what we call Spot FX Cash Markets. CFDs as you suggested are for trading commodities.

  2. From a retail trading, (speculating) point of view with retail brokers, which 99% of us will be using, we are not taking part in the underlying market. Not now, and not ever. You are not buying or selling anything, regardless of the terminology implemented on your trading platform. What you are doing is placing a bet with your retail broker. The retail broker takes all their clients and nets off longs against shorts in-house, the leftover exposure is then typically placed into the [B][U]real[/U][/B] market. So, with this being said, you are also never exchanging one currency for another.

  3. You hit the nail on the head. The primary purpose of the FX markets is to exchange currencies, for what ever reason, be it commercial hedging or risk mitigation. Speculating on the FX markets are a sub thread of the FX markets primary purpose, and a very lucrative activity if you can get it right.

Yes, there are forex CFDs just as there are CFDs for all financial markets - forex, indices, stocks, commodities, etc.

It’s a private transaction between you and the “broker”.

It isn’t really “in the market” at all.

You’ve having a bet, not buying or selling anything.

The same is true with most conventional retail forex brokers as well, though some do trade in the real market on behalf of their customers.

That’s only about 10% even of the real forex market (interbank market).

All the rest is speculation.