As we described earlier, market participants get profit from many sources (changes in the prices of market assets, dividends, interest rates, etc.) and work with instruments that are traded both on exchanges and on over-the-counter platforms. The simplest of the entire list and the most popular is making money by changing prices. If you buy an asset (for example, gold), before the price rises, and close the position after the price rises, you can get more money for this asset than was invested during the purchase. Today we will consider how this process is technically carried out on exchanges, on the Forex market and, separately, on cryptocurrency exchanges.
Investing on the stock exchange.
Exchanges are trading floors where financial instruments are traded these are commodities, energy, precious metals, currencies, stocks of companies, stock indices, etc. Derivatives (futures, options), which are mutual obligations of participants, are also traded on exchanges. Securities of this type represent the obligation (or opportunity) to acquire in the future the assets themselves at a fixed price.
Exchanges are intermediaries between buyers and sellers, and charge a commission for intermediary services. For a fee in the form of a commission, exchanges guarantee the fulfillment of obligations between participants in transactions. On exchanges, the fair price of an asset at the current moment is determined by auction, and the financial instrument itself acquires liquidity each participant can buy or sell the amount of a certain asset he needs.
Types of exchanges.
As we have already said, depending on the type of asset, it is traded on a certain exchange platform, which offers similar types of financial instruments:
Shares are traded on stock exchanges, it can be like exchanges of individual countries (where shares of local companies are represented) or global exchanges where you can work with shares of the largest companies in the world. By the way, the same shares can be traded on different platforms at the same time. For example, some Asian papers, besides the Hong Kong Stock Exchange, are represented on the largest stock markets Frankfurt and New York.
Assets such as sugar, grain, frozen meat, coffee, pork, energy (oil, natural gas), timber, and precious metals are traded on commodity exchanges these assets serve as raw materials and are used for processing. As with stocks, there are local sites and international exchanges for them. For example, coffee in the form of beans is traded on the London LIFFE exchange, in the USA on NYMEX and, of course, on the sites of countries where coffee is grown.
Currency is traded (meaning the sale of one currency for the banknotes of another country) on foreign exchange exchanges and on Forex. On exchanges, an exchange can occur in the mode of derivatives transactions (delivery after a certain time) or in the spot mode settlement of transactions (most often within two days). In turn, Forex is a spot market, here all calculations are carried out immediately.
Cryptoexchange. ICO / Token exchanges. The type of exchanges where the newest type of goods is traded cryptocurrencies and tokens of various decentralized projects. Usually the purchase is instant. Minimal regulation.
The mechanics of transactions on the exchange.
Now we will describe the scheme of working with exchange instruments. On old exchanges, private traders can buy and sell assets through a broker. The broker is an intermediary between the trader and the exchange, he transmits orders for the purchase and sale, which immediately appear in the list of applications. The vast majority of transactions with exchange-traded assets is carried out through an Internet broker, which provides a trading platform that is installed on the trader’s computer and all operations go through it.
The current price of an asset on the exchange is formed on the basis of an auction, all offers for sale and purchase are displayed in the “exchange glass” a table in which you can see the number of lots at each price level.
Sellers offer buyers a financial instrument at prices that are slightly higher than the current market price, they want to sell as expensive as possible. In turn, sellers who offer goods at a lower price (at the price most attractive to the buyer) are more likely to sell. To higher price levels, the price will rise only after applications are processed at the nearest lower levels.
The same is true with buyers who place their bids below the market price they want to buy as cheaply as possible. But the closer the application is to the current price, the more likely it is to successfully buy the right tool, because the price may not drop lower, then the application will not be processed.
List of the largest world exchanges:
New York Stock Exchange, New-York Stock Exchange (NYSE);
NASDAQ - shares of high-tech companies;
Tokyo Stock Exchange, Tokyo Stock Exchange;
London Stock Exchange, London Stock Exchange (LSE);
Australian Stock Exchange, Australian Stock Exchange (ASX);
Bombay Stock Exchange, BSE Bombay Stock Exchange India;
Euronext, the European Stock Exchange, integrates the NYSE Amsterdam, Brussels, Paris and Portuguese Stock Exchanges;
Hong Kong Stock Exchange; Hong Kong Exchange;
Istanbul Stock Exchange (Turkey), Istanbul Stock Exchange;
Italian Stock Exchange, Italian Stock Exchange.
Forex (Foreign Exchange - "international exchange") is an over-the-counter market where you can exchange currencies one for another. Participants in Forex transactions are banks, investment funds, corporations, as well as private investors. Most of the conversion transactions go through Forex, since the absence of an intermediary represented by the exchange platform makes the exchange more profitable. In turn, it is more profitable for private traders who earn speculative profits on exchange rate differences to work on Forex than to trade financial instruments on stock exchanges.
Forex Operation Mechanics
As on a regular exchange, a private trader can trade on Forex through a broker a company that provides the conclusion of transactions on the international market, where applications are processed, as well as the Dealing Center.
Operations are carried out through the trading terminal, which provides a broker. Foreign Exchange is a spot market payment is made immediately, and the goods are delivered every other day. Often (especially when working through a broker or DC), the client is not interested in the supply therefore, the transaction is “extended” daily for one day. Previously, this was done by closing a deal and opening a similar one, now it is done using a swap operation (charging a fixed amount - positive or negative every day).
Differences Forex from exchanges
Consider in general terms the differences between OTC markets and trading on exchanges
Lack of leverage on stock and commodity exchanges is an investor cannot purchase more shares than the amount that he can actually pay. The rate of an asset during the day can change, for example, by 3%, just such an increase in the deposit can get a speculator. That is, to get any significant profit, you need solid capital, otherwise the meaning of the work is lost. In reality, you will not be able to receive stably more than a few percent per month (i.e., having $ 100,000 you can only get $ 1000-2000 per month)
In forex and some other over-the-counter markets, DCs offer “margin trading”, the meaning of which is to lend to the trader. When a trader opens a position, DC provides the trader with an amount that significantly exceeds the invested funds and brings the transaction to the market. In this case, the operator does not risk anything, since as the price changes against the forecast, he simply closes the transaction and writes off the loss from the trader's account. The trader, in turn, has the opportunity to buy a lot more asset than the amount that he can pay. Accordingly, it can get much more profit than with speculation on the exchange.
Exchange platforms, operating in various countries, operate during strictly defined hours. For example, in order to work with assets that are traded on the American NASDAQ site, a trader must limit working time to New York daytime, which is not always convenient. Forex works around the clock, so a private investor can conclude transactions at any time convenient for him.
Well, finally, we need to mention the commissions. As we have said, exchanges take significant commissions are the amount of these commissions for Forex is significantly reduced (not talking about predatory 0.1% as opposed to transactions on exchange platforms. Also, there is no need for Forex to pay a monthly fee for maintaining an account, for depository and other services that present at stock brokers.
Broker or Dealing Center
The broker places a client's application for one of the exchanges where he has accreditation. The essence of the Dealing Center’s work is not only to put an order from the client to the market but also to find the maximum number of sources of liquidity that is, if they want to buy euros for dollars at various sites DC should provide the client with the most profitable options out of the maximum possible amount sources. Often, DC cooperates with several brokers, which give it the opportunity to work with several exchanges at once - even without accreditation there. The DC also has the right to clear - join orders of different clients and place them in one lot - or join part of various orders within the system.
The Dealing Center can carry out operations not only in the Forex market - but also in any other markets. And at the same time - usually on one trading account you can make transactions both in the foreign exchange and stock markets (usually through contracts for difference), as well as futures for metals, etc. Now you can even trade cryptocurrencies in many DCs, although their rate is less profitable than on the cryptocurrency exchange.
Crypto-exchanges are the most modern type of markets; trading takes place exclusively on the Internet. Many cryptocurrency exchanges offer margin trading and, for ease of use, approach work on Forex.
Considering the various aspects of investing on exchanges and OTC markets, it becomes clear that exchanges are a more suitable place for large investors who invest in the long term. Private traders, as well as those who are interested in quick profit and high risk, are better suited to the Forex market, as well as trading in other markets through Dealing Centers. Separately, there are crypto exchanges, trading on which is carried out on the most profitable and risky asset cryptocurrencies and tokens. They also offer margin trading with leverage up to 1:50. The actual lack of regulation makes them the most transparent and easy type of investment.