The idea of getting rich through the resale of financial instruments, such as stocks or currencies, seems very attractive. With the development of the Internet, it has become especially widespread. Numerous brokers and dealers attract an inexperienced client and promise golden mountains. At the same time, some actively advertise Forex trading in currency pairs, while others are campaigning to invest in the stock exchange market of Russia, that is, to buy shares of domestic companies. Many people believe that the difference between these sites is only in the tools available for trading. In fact, this is just the tip of the iceberg. But in order to understand everything, you will have to go a little deeper into economic theory.
What are the markets?
As part of the global financial market, it is customary to distinguish several main segments: stock (including term), foreign exchange, insurance, investment and capital markets. For the ordinary investor (trader), the first two segments are of interest, while all the others are the lot of professionals. In the stock market, primary securities are traded - stocks and bonds. The derivatives market is the place of circulation of derivatives - derivatives contracts (futures, forwards, options, swaps). In the foreign exchange market, as its name implies, a currency exchange takes place.
What are stock and over-the-counter markets?
Depending on how the financial instruments circulation process is organized, it is customary to divide markets into exchange and over-the-counter. If we consider the stock, derivatives or foreign exchange market, there are exchange and OTC segments in each of them.
A stock market is an asset trading organized by a stock exchange. It establishes the procedure for bidding and settlements, a list of traded instruments and other rules. Counterparties look for each other inside the exchange platform through their brokers, and the exchange acts as a guarantor when concluding a transaction. The exchange is a legal entity that has an address for tendering and a mode of operation. Previously, “coming to the exchange” meant literally coming to this site and making deals with other traders live. Now everything has been greatly simplified - the exchange trading market has become almost completely electronic. However, the main task of the exchange has remained the same - to organize tenders and act as a guarantor of the transaction.
The OTC segment of any market exists outside the exchange and is much less regulated. OTC market is not tied to any platform and exists virtually. In some ways, it can be called more free. At the same time, the parties do not have any third party guarantees that the asset will be transferred to the buyer, and the funds will be transferred to the seller.
Exchange Trading
Encouraging future investors to transfer money to the stock market, brokers mean precisely the exchange. Although theoretically you can buy shares directly from the owner - a private individual or company. However, this is due to the mass of inconveniences, ranging from searching for a counterparty and ending with documenting. The exchange trading market assumes that all these concerns are taken over by the exchange.
The interests of the client on the exchange are represented by a broker. He receives instructions from a trader through a special program (trading terminal) and conducts the corresponding operations. The quotes that the trader sees in his terminal are real transactions or requests from other traders. They will be the same if you open, say, several terminals from different brokers.
Thus, the exchange trading market provides a private trader with access to the global trading platform, where he can carry out transactions with other such traders. Neither the exchange nor the broker is interested in any of the merchants making or losing money. Their business is built on the receipt of commission deductions that bidders pay, regardless of their outcome.
FOREX - OTC Currency Trading
Unlike the stock exchange market in which stocks are traded, FOREX is its OTC counterpart. This is a global currency trading market in which mainly central banks of different countries and other financial institutions participate. Small participants join large ones through a number of intermediary organizations. A private trader for trading on FOREX goes to a dealer - a company whose functions are similar to the functions of an exchange broker. Outwardly, everything looks approximately the same - the same trading via the Internet, the same placing applications for purchase and sale.
But there are moments that fundamentally distinguish the exchange trading market from FOREX. The fact is that in most cases, a FOREX dealer does not display a client’s application for a global over-the-counter platform where large banks trade currency. This is simply not possible because the lots in this market are measured in thousands or even millions. The dealer brings its customers to its own mini-market, and most often acts as a counterparty itself. It turns out that the trader is trading against his dealer. At the same time, the latter shows quotes of currencies, which it also sets independently. They are close to the real FOREX quotes, but differ in the direction disadvantageous for the client.
It turns out that the FOREX dealer is a large currency exchange point: it sets quotes and acts as one of the parties to the transaction. It is easy to guess who will benefit as a result.
Legal moment
Exchange activity in Russia has been subject to licensing since the mid 90s - now the Central Bank is engaged in this. Serious requirements are imposed on license applicants, including authorized capital in the amount of millions of rubles, which indicates the reliability of the mechanism for entering the stock exchange through a broker. In addition, they do not have access to the money and shares of their customers - all assets are stored in special accounts on the exchange.
But FOREX dealers, the Central Bank is only trying to take control. Recently, their activities are also licensed, but there are only a few companies that have received the appropriate license. Others simply bypass the law - they work through offshore companies. Thus, to trade on FOREX, a trader transfers his own funds to a certain company, probably registered somewhere in the Cayman Islands or in Cyprus.
What about a trader who, in spite of everything, still wants to trade currency? Of course, no one can forbid a person to try his hand at FOREX. The main thing is to carefully choose a dealer from among the largest and not risk large sums. But a more reliable way is to go to the Moscow Exchange, in the derivatives section of which you can buy and sell futures for some currency pairs.