To my knowledge, there are two models of currency trading, spot trading and margin trading. Spot trading is currency trading model which is commonly done. You go to a money changer and then exchange some money into other currencies, according to the exchange rate valid at the time.
Margin trading has a different mechanism. I have written a brief description of the model is margin trading in another article, please search in this blog. Forex trading using this model.
Below is a model of forex trading transactions:
INVESTOR (you) <=> BROKER <=> MARKETAs trading activity in general, it takes two sides to cooperate in order for a transaction occurs, ie that the buying and selling parties. Brokers act as middle-man, its job is to forward your order to the market, because you do not have direct access to the forex market. You tell your broker to buy or sell forex and it is the one who process your transactions to the market.
So, basically the task of brokers is to collect the transactions from the retail investor and then forward it to the market. Lets say Mr. Jack believe That CAD is going to be stronger agains USD, he bought some euros, say EUR 1,000.00. This means Mr. Jack bought the euro as much as 1 lot. Lot is a unit of transaction in Forex Trading. Buy 2 lots means buying euros as much as 2,000.00, a three lot mean 3,000.00, and so on.
In all trade transactions, of course there are those who sell and there are those who buy. In this case, Mr. Jack is the buyer. Then who are the sellers? In the meantime, brokers where Mr.. Jack's deal is the seller. Brokers will accommodate temporary transactions dealed by Mr. Jack (and of course by other investors). After that, the broker will forward orders to the market or other large banks. Investors (or traders) need a broker because they can not access the market directly.
Capitalization of the forex market is really massive, which is about 3.8 trillion U.S. dollars for each day. In this market an order from Mr. Jack is forwarded and processed. Mr. Jack does not need to care about the transaction process in its market. He just needs to know that his desire to purchase 1,000.00 EUR has been met. If then EUR is getting stronger again, then Mr. Jack will get capital gains. But if the opposite is true, then Mr. Jack will incur a loss.
There are many futures exchanges in the world. America has the NYBOT, the London FTSE and Japan have TOCOM. Forex Exchange is quite unique, although there are many exchanges, but the trade remains open (open market). If the stock market, a stock can be traded only on exchanges where the shares are listing (market close).
