Forex Prices
If you want to be successful at forex trading then you need to know how and why prices move - many traders think this is obvious but its not and that's why 95% of traders lose. Here we will look at the factors that move currency markets and how you can profit.
First let's start with a simple equation:
Supply and Demand Fundamentals + Investor Perception = Price
While the above equation is simple enough, it's deceptive and most traders fail to understand its significance, when they learn forex trading.
Fundamentals
These are the supply and demand facts and they help move price but the person studying these facts has a problem - while the facts are there for all to see, we all see them differently and draw our own conclusions about what they mean.
Our actions combined with millions of other traders, creates the price.
The facts are there for all traders to see but we all draw different conclusions that's why the facts alone are not enough to help you trade.
It's a fact that markets collapse when they are most bullish and rally when they are at their most bearish - this is investor psychology at work.
Investor Perception
Of the facts creates the price and we are not creatures of logic, we are creatures of emotion and these are reflected in the price.
It's a fact that greed and fear dominate investors and these emotions cause price spikes away from fair value. These price spikes never last long and are easy to see on any forex chart and they never last long and return to fair value.
So what do you need to understand in terms of the above, in terms of your forex education? Here are the salient points:
- Never predict price movement as humans behaviour cannot be predicted - Trading fundamentals by themselves is hard as its only half the equation - Trading is a game of odds and you need to get the odds in your favour to win
Now you know the above how do you get a forex trading strategy for currency trading success?
The simplest way is to base your forex trading strategy on forex technical analysis.
Not only does it take into account the fundamentals it also takes into account how investors perceive them.
Technical analysis simply assumes that all fundamentals will be quickly be reflected in price action and in today's world of instant communications and online trading, this is truer than ever before.
Technical analysis more importantly, takes into account how investors perceive the fundamentals. While prices do not move to a scientific theory, human nature is constant and this is reflected in repetitive price patterns on any forex chart.
While charting is not a science, certain formations that present themselves do offer trades where you can put the odds in your favour, with a robust currency trading system.
You won't win every trade - but if you trade the odds, you will win more than you lose and pile up huge long term profits.
Most novice traders when they try and learn currency exchange don't understand the way prices really move and think they can predict, trade news stories and use scientific theories and they lose. To win at forex trading the best way to trade is to trade the reality of forex prices changes - without predicting, focus on the odds and assume any trade can go wrong.
The equation for forex price movement is essentially simple but deceptive.
Now you know how and why forex prices really move, you can build a forex trading system to help you enjoy currency trading success.
Friday, July 31, 2009
Sunday, May 17, 2009
Spice Trade
Spice trade is a commercial activity of ancient origin which involves the merchandising of spices and herbs.
1. Civilizations of Asia were involved in spice trade from the ancient times, and the Greco-Roman world soon followed by trading along the Incense route.
2. and the Roman-India routes.
3. The Roman-Indian routes were dependent upon techniques developed by the maritime trading power, Kingdom of Axum (ca 400s BC–AD 1000s) which had pioneered the Red Sea route before the 1st century.
When they encountered Rome (circa 30 BCE– 10 CE) they shared knowledge of riding the Monsoons of the route on to Rome, keeping a cordial relationship with one another until the mid-seventh century, when the rise of Islam closed off the overland caravan routes through Egypt and the Suez, and sundered the European trade community from Axum and India. Arab traders eventually took over conveying goods via the Levant and Venetian merchants to Europe until the rise of the Ottoman Turks cut the route again by 1453.
Overland routes helped the spice trade initially, but maritime trade routes led to tremendous growth in commercial activities. During the high and late medieval periods Muslim traders dominated maritime spice trading routes throughout the Indian Ocean, tapping source regions in the Far East and shipping spices from trading emporiums in India westward to the Persian Gulf and the Red Sea, from which overland routes led to Europe.
The trade was transformed by the European Age of Discovery, during which spice trade became an influential activity for European traders. The route from Europe to the Indian Ocean via the Cape of Good Hope was pioneered by European navigators, such as Vasco Da Gama, resulting in new maritime routes for trade.
This trade — driving the world economy from the end of the middle ages well into the modern times - ushered an age of European domination in the East. Channels, such as the Bay of Bengal, served as bridges for cultural and commercial exchanges between diverse cultures as nations struggled to gain control of the trade along the many spice routes.
European dominance was slow to develop. The Portuguese trade routes were mainly restricted and limited by the use of ancient and difficult to dominate routes, ports, and nations. The Dutch were later able to bypass much of these problems by pioneering a direct ocean route from the Cape of Good Hope to the Sunda Strait in Indonesia.
Thursday, May 14, 2009
The International Trade
International trade is the exchange of goods and services across national borders. In most countries, it represents a significant part of GDP. While international trade has been present throughout much of history, its economic, social, and political importance have increased in recent centuries, mainly because of Industrialisation, advanced transportation, globalisation, multinational corporations, and outsourcing. In fact, it is probably the increasing prevalence of international trade that is usually meant by the term "globalisation".
Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialisation, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions. read the story...
related articles:
Trade Policies of other Countries
Trades 20th century
Trading Communities and Customs Unions
Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialisation, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions. read the story...
related articles:
Trade Policies of other Countries
Trades 20th century
Trading Communities and Customs Unions
Wednesday, May 13, 2009
The Trading Business
Trade is the voluntary exchange of goods, services, or both. Trade is also called commerce. A mechanism that allows trade is called a market.
The original form of trade was barter, the direct exchange of goods and services. Later one side of the barter were the metals, precious metals (poles, coins), bill, paper money.
Modern traders instead generally negotiate through a medium of exchange, such as money. As a result, buying can be separated from selling, or earning.
The invention of money (and later credit, paper money and non-physical money) greatly simplified and promoted trade.
Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade.
Trade exists for man due to specialization and division of labor, most people concentrate on a small aspect of production, trading for other products.
Trade exists between regions because different regions have a comparative advantage in the production of some tradable commodity, or because different regions' size allows for the benefits of mass production.
As such, trade at market prices between locations benefits both locations.
Trading can also refer to the action performed by traders and other market agents in the financial markets.
Trade originated with the start of communication in prehistoric times. Trading was the main facility of prehistoric people, who bartered goods and services from each other before the innovation of the modern day currency.
Peter Watson dates the history of long-distance commerce from circa 150,000 years ago.
Trade is believed to have taken place throughout much of recorded human history. There is evidence of the exchange of obsidian and flint during the stone age.
Materials used for creating jewelry were traded with Egypt since 3000 BC. Long-range trade routes first appeared in the 3rd millennium BC, when Sumerians in Mesopotamia traded with the Harappan civilization of the Indus Valley.
The Phoenicians were noted sea traders, traveling across the Mediterranean Sea, and as far north as Britain for sources of tin to manufacture bronze. For this purpose they established trade colonies the Greeks called emporia.
From the beginning of Greek civilization until the fall of the Roman empire in the 5th century, a financially lucrative trade brought valuable spice to Europe from the far east, including China. Roman commerce allowed its empire to flourish and endure.
The Roman empire produced a stable and secure transportation network that enabled the shipment of trade goods without fear of significant piracy.
The original form of trade was barter, the direct exchange of goods and services. Later one side of the barter were the metals, precious metals (poles, coins), bill, paper money.
Modern traders instead generally negotiate through a medium of exchange, such as money. As a result, buying can be separated from selling, or earning.
The invention of money (and later credit, paper money and non-physical money) greatly simplified and promoted trade.
Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade.
Trade exists for man due to specialization and division of labor, most people concentrate on a small aspect of production, trading for other products.
Trade exists between regions because different regions have a comparative advantage in the production of some tradable commodity, or because different regions' size allows for the benefits of mass production.
As such, trade at market prices between locations benefits both locations.
Trading can also refer to the action performed by traders and other market agents in the financial markets.
Trade originated with the start of communication in prehistoric times. Trading was the main facility of prehistoric people, who bartered goods and services from each other before the innovation of the modern day currency.
Peter Watson dates the history of long-distance commerce from circa 150,000 years ago.
Trade is believed to have taken place throughout much of recorded human history. There is evidence of the exchange of obsidian and flint during the stone age.
Materials used for creating jewelry were traded with Egypt since 3000 BC. Long-range trade routes first appeared in the 3rd millennium BC, when Sumerians in Mesopotamia traded with the Harappan civilization of the Indus Valley.
The Phoenicians were noted sea traders, traveling across the Mediterranean Sea, and as far north as Britain for sources of tin to manufacture bronze. For this purpose they established trade colonies the Greeks called emporia.
From the beginning of Greek civilization until the fall of the Roman empire in the 5th century, a financially lucrative trade brought valuable spice to Europe from the far east, including China. Roman commerce allowed its empire to flourish and endure.
The Roman empire produced a stable and secure transportation network that enabled the shipment of trade goods without fear of significant piracy.
Exchanged Merchandise
Between 1440 and 1880 Europeans and North Americans exchanged merchandise for slaves along 5600 km (3500 miles) of Africa’s western and west central Atlantic coasts. These slaves were then transported to other locations around the Atlantic Ocean. read the story...
other story to read:
Emergence of Modern Foreign Trade
Although foreign trade was an important part of ancient and medieval economies, it acquired new significance after about 1500.
As empires and colonies were established by European countries, trade became an arm of governmental policy. read the sotory...
related story:
Modernization and Innovation of Trade Business
Trade Policies of other Countries
Trades 20th century
Trading Communities and Customs Unions
other story to read:
Emergence of Modern Foreign Trade
Although foreign trade was an important part of ancient and medieval economies, it acquired new significance after about 1500.
As empires and colonies were established by European countries, trade became an arm of governmental policy. read the sotory...
related story:
Modernization and Innovation of Trade Business
Trade Policies of other Countries
Trades 20th century
Trading Communities and Customs Unions
International Trade
International trade is the exchange of goods and services across national borders. In most countries, it represents a significant part of GDP. While international trade has been present throughout much of history, its economic, social, and political importance have increased in recent centuries, mainly because of Industrialisation, advanced transportation, globalisation, multinational corporations, and outsourcing. In fact, it is probably the increasing prevalence of international trade that is usually meant by the term "globalisation".
Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialisation, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions.
Trade sanctions against a specific country are sometimes imposed, in order to punish that country for some action. An embargo, a severe form of externally imposed isolation, is a blockade of all trade by one country on another. For example, the United States has had an embargo against Cuba for over 40 years.
Although there are usually few trade restrictions within countries, international trade is usually regulated by governmental quotas and restrictions, and often taxed by tariffs. Tariffs are usually on imports, but sometimes countries may impose export tariffs or subsidies. All of these are called trade barriers. If a government removes all trade barriers, a condition of free trade exists. A government that implements a protectionist policy establishes trade barriers.
The fair trade movement, also known as the trade justice movement, promotes the use of labour, environmental and social standards for the production of commodities, particularly those exported from the Third and Second Worlds to the First World. Such ideas have also sparked a debate on whether trade itself should be codified as a human right.
Standards may be voluntarily adhered to by importing firms, or enforced by governments through a combination of employment and commercial law. Proposed and practiced fair trade policies vary widely, ranging from the commonly adhered to prohibition of goods made using slave labour to minimum price support schemes such as those for coffee in the 1980s. Non-governmental organizations also play a role in promoting fair trade standards by serving as independent monitors of compliance with fairtrade labelling requirements.
related articles:
Trade Policies of other Countries
Trades 20th century
Trading Communities and Customs Unions
Import Quotas
Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialisation, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions.
Trade sanctions against a specific country are sometimes imposed, in order to punish that country for some action. An embargo, a severe form of externally imposed isolation, is a blockade of all trade by one country on another. For example, the United States has had an embargo against Cuba for over 40 years.
Although there are usually few trade restrictions within countries, international trade is usually regulated by governmental quotas and restrictions, and often taxed by tariffs. Tariffs are usually on imports, but sometimes countries may impose export tariffs or subsidies. All of these are called trade barriers. If a government removes all trade barriers, a condition of free trade exists. A government that implements a protectionist policy establishes trade barriers.
The fair trade movement, also known as the trade justice movement, promotes the use of labour, environmental and social standards for the production of commodities, particularly those exported from the Third and Second Worlds to the First World. Such ideas have also sparked a debate on whether trade itself should be codified as a human right.
Standards may be voluntarily adhered to by importing firms, or enforced by governments through a combination of employment and commercial law. Proposed and practiced fair trade policies vary widely, ranging from the commonly adhered to prohibition of goods made using slave labour to minimum price support schemes such as those for coffee in the 1980s. Non-governmental organizations also play a role in promoting fair trade standards by serving as independent monitors of compliance with fairtrade labelling requirements.
related articles:
Trade Policies of other Countries
Trades 20th century
Trading Communities and Customs Unions
Import Quotas
Slave Trade
Atlantic Slave Trade, the forced transportation of at least 10 million enslaved Africans from their homelands in Africa to destinations in Europe and the Americas during the 15th through 19th centuries. European and North American slave traders transported most of these slaves to areas in tropical and subtropical America, where the vast majority worked as laborers on large agricultural plantations.
Between 1440 and 1880 Europeans and North Americans exchanged merchandise for slaves along 5600 km (3500 miles) of Africa’s western and west central Atlantic coasts. These slaves were then transported to other locations around the Atlantic Ocean.
The vast majority went to Brazil, the Caribbean, and Spanish-speaking regions of South America and Central America. Smaller numbers were taken to Atlantic islands, continental Europe, and English-speaking areas of the North American mainland.
Approximately 12 million slaves left Africa via the Atlantic trade, and more than 10 million arrived. The Atlantic slave trade involved the largest intercontinental migration of people in world history prior to the 20th century. This transfer of so many people, over such a long time, had enormous consequences for every continent bordering the Atlantic.
It profoundly changed the racial, social, economic, and cultural makeup in many of the American nations that imported slaves. It also left a legacy of racism that many of those nations are still struggling to overcome.
Between 1440 and 1880 Europeans and North Americans exchanged merchandise for slaves along 5600 km (3500 miles) of Africa’s western and west central Atlantic coasts. These slaves were then transported to other locations around the Atlantic Ocean.
The vast majority went to Brazil, the Caribbean, and Spanish-speaking regions of South America and Central America. Smaller numbers were taken to Atlantic islands, continental Europe, and English-speaking areas of the North American mainland.
Approximately 12 million slaves left Africa via the Atlantic trade, and more than 10 million arrived. The Atlantic slave trade involved the largest intercontinental migration of people in world history prior to the 20th century. This transfer of so many people, over such a long time, had enormous consequences for every continent bordering the Atlantic.
It profoundly changed the racial, social, economic, and cultural makeup in many of the American nations that imported slaves. It also left a legacy of racism that many of those nations are still struggling to overcome.
Trading in other Securities
Exchanges trade in all forms of securities. Although the general operations of exchanges apply to all securities trading, there are some differences. In particular, trades in nonstock securities, such as bonds and options, are often managed by financial intermediaries other than brokers.
Institutional Brokers
Institutional brokers specialize in bulk purchases of securities, including bonds, for institutional investors. Institutional investors include large investors such as banks, pension funds, and mutual funds.
Institutional brokers generally charge their clients a lower fee per unit than brokers who trade for individual investors. This is the case because the total cost of both large and small transactions is much the same.
When this total cost is spread over a larger number of shares, then the cost per share is lower. Given the lower per-share cost, institutional brokers can charge a lower per-share fee.
Institutional brokers generally charge their clients a lower fee per unit than brokers who trade for individual investors. This is the case because the total cost of both large and small transactions is much the same.
When this total cost is spread over a larger number of shares, then the cost per share is lower. Given the lower per-share cost, institutional brokers can charge a lower per-share fee.
Stockbroker
A stockbroker is an employee of a brokerage firm. The individual investor contacts his or her stockbroker and provides the stockbroker with the details of the transaction the investor wants to complete. Stockbrokers, however, are more than order takers or sales representatives for their firms; they frequently provide advice to the investor.
They may have their own client list and call clients when they see transactions that will fit the client’s investment objectives. Stockbrokers almost always have certification from, or registration with, a state government agency or an exchange or both. For this reason they are sometimes referred to as registered representatives.
They may have their own client list and call clients when they see transactions that will fit the client’s investment objectives. Stockbrokers almost always have certification from, or registration with, a state government agency or an exchange or both. For this reason they are sometimes referred to as registered representatives.
Energy Trading
Enron Corporation, energy and commodities trading company.
Under Lay’s leadership, Enron began to transform itself from a gas pipeline company into a global energy trader. It began trading natural gas commodities in 1989 and electricity in 1994.
Enron eventually became the largest marketer of natural gas in North America and the United Kingdom and the largest marketer of electricity in the United States. Enron branched into other areas of commodities trading, including chemicals, coal, fiber-optic bandwidth, metals, and paper.
It also continued to acquire physical assets, such as a pipeline in Argentina and an electric utility, Portland General Electric, which supplied electricity to 750,000 customers in Oregon.
Enron enjoyed enormous success during the 1990s and into 2000. Its stock price climbed from less than $10 a share in 1991 to a high of $90 in 2000. From 1998 to 2000 its reported revenues increased from $31 billion to more than $100 billion, earning it a place as the seventh-largest company on the Fortune 500 list of the 500 largest companies in the United States. By March 2000 Enron was regarded as the sixth-largest energy company in the world.
Under Lay’s leadership, Enron began to transform itself from a gas pipeline company into a global energy trader. It began trading natural gas commodities in 1989 and electricity in 1994.
Enron eventually became the largest marketer of natural gas in North America and the United Kingdom and the largest marketer of electricity in the United States. Enron branched into other areas of commodities trading, including chemicals, coal, fiber-optic bandwidth, metals, and paper.
It also continued to acquire physical assets, such as a pipeline in Argentina and an electric utility, Portland General Electric, which supplied electricity to 750,000 customers in Oregon.
Enron enjoyed enormous success during the 1990s and into 2000. Its stock price climbed from less than $10 a share in 1991 to a high of $90 in 2000. From 1998 to 2000 its reported revenues increased from $31 billion to more than $100 billion, earning it a place as the seventh-largest company on the Fortune 500 list of the 500 largest companies in the United States. By March 2000 Enron was regarded as the sixth-largest energy company in the world.
Trading Communities and Customs Unions
Several trading communities have been established to promote trade among countries that have common economic and political interests or are located in a particular region.
Within these trade groups, preferential tariffs are administered that favor member countries over nonmembers. Non-Communist countries encouraged trade-promoting programs to stimulate the redevelopment of economies ruined during World War II.
The North American Free Trade Agreement (NAFTA), ratified by Mexico, the United States, and Canada in 1993, was designed to bring about a free market in everything produced and consumed in the three countries.
Within these trade groups, preferential tariffs are administered that favor member countries over nonmembers. Non-Communist countries encouraged trade-promoting programs to stimulate the redevelopment of economies ruined during World War II.
The North American Free Trade Agreement (NAFTA), ratified by Mexico, the United States, and Canada in 1993, was designed to bring about a free market in everything produced and consumed in the three countries.
Trade Policies of other Countries
Because foreign trade is such an integral part of a nation's economy, governmental restrictions are sometimes necessary to protect what are regarded as national interests. Government action may occur in response to the trade policies of other countries, or it may be resorted to in order to protect specific industries.
Since the beginnings of international trade, nations have striven to achieve and maintain a favorable balance of trade—that is, to export more than they import.
In a money economy, goods are not merely bartered for other goods. Instead, products are bought and sold in the international market with national currencies. In an effort to improve its balance of international payments (that is, to increase reserves of its own currency and reduce the amount held by foreigners), a country may attempt to limit imports.
Such a policy aims to control the amount of currency that leaves the country.
Since the beginnings of international trade, nations have striven to achieve and maintain a favorable balance of trade—that is, to export more than they import.
In a money economy, goods are not merely bartered for other goods. Instead, products are bought and sold in the international market with national currencies. In an effort to improve its balance of international payments (that is, to increase reserves of its own currency and reduce the amount held by foreigners), a country may attempt to limit imports.
Such a policy aims to control the amount of currency that leaves the country.
Import Quotas
One method of limiting imports is simply to close the ports of entry into a country. More commonly, maximum allowable import quantities may be set for specific products. Such quantity restrictions are known as quotas.
These may also be used to limit the amount of foreign or domestic currency that is permitted to cross national borders. Quotas are imposed as the quickest means to stop or even reverse a negative trend in a country's balance of payments.
They are also used as the most effective means of protecting domestic industry from foreign competition.
These may also be used to limit the amount of foreign or domestic currency that is permitted to cross national borders. Quotas are imposed as the quickest means to stop or even reverse a negative trend in a country's balance of payments.
They are also used as the most effective means of protecting domestic industry from foreign competition.
A Tariff
Another common way of restricting imports is by imposing tariffs, or taxes on imported goods. A tariff, paid by the buyer of the imported product, makes the price higher for that item in the country that imported it. The higher price reduces consumer demand and thus effectively restricts the import.
The taxes collected on the imported goods also increase revenues for the nation's government. Furthermore, tariffs serve as a subsidy to domestic producers of the items taxed because the higher price that results from a tariff encourages the competing domestic industry to expand production.
The taxes collected on the imported goods also increase revenues for the nation's government. Furthermore, tariffs serve as a subsidy to domestic producers of the items taxed because the higher price that results from a tariff encourages the competing domestic industry to expand production.
Nontariff Barriers to Trade
In recent years the use of nontariff barriers to trade has increased. Although these barriers are not necessarily administered by a government with the intention of regulating trade, they nevertheless have that result.
Such nontariff barriers include government health and safety regulations, business codes of conduct, and domestic tax policies. Direct government support of various domestic industries is also viewed as a nontariff barrier to trade, because such support puts the aided industries at an unfair advantage among trading nations.
Such nontariff barriers include government health and safety regulations, business codes of conduct, and domestic tax policies. Direct government support of various domestic industries is also viewed as a nontariff barrier to trade, because such support puts the aided industries at an unfair advantage among trading nations.
Trades 20th century
In the first half of the 20th century, equal tariffs for similar goods was not the policy of all nations. Countries levied differential tariffs (charging lower tariffs to favored nations) and established other restrictive trading practices as weapons to fight unfriendly nations. Trade policy became the source of many international economic disputes, and trade was severely affected during times of war.
Trade Negotiations
Attempts were first made in the 1930s to coordinate international trade policy. At first countries negotiated bilateral treaties. Later, following World War II, international organizations were established to promote trade by, for example, liberalizing tariff and nontariff trade barriers.
The General Agreement on Tariffs and Trade, or GATT, signed by 23 non-Communist nations in 1947, was the first such agreement designed to remove or loosen barriers to free trade. GATT members held a number of specially organized rounds of negotiations that significantly reduced tariffs and other restrictions on world trade.
After the round of negotiations that ended in 1994, the member nations of GATT signed an agreement that provided for establishment of the World Trade Organization (WTO). The WTO began operation in January 1995 and coexisted with GATT until December 1995, after which GATT ceased to exist.
All of the 128 contracting parties to the 1994 GATT agreement eventually transferred membership to the WTO. See also Commercial Treaties.
The General Agreement on Tariffs and Trade, or GATT, signed by 23 non-Communist nations in 1947, was the first such agreement designed to remove or loosen barriers to free trade. GATT members held a number of specially organized rounds of negotiations that significantly reduced tariffs and other restrictions on world trade.
After the round of negotiations that ended in 1994, the member nations of GATT signed an agreement that provided for establishment of the World Trade Organization (WTO). The WTO began operation in January 1995 and coexisted with GATT until December 1995, after which GATT ceased to exist.
All of the 128 contracting parties to the 1994 GATT agreement eventually transferred membership to the WTO. See also Commercial Treaties.
Advantages of Trade
In 1776 the Scottish economist Adam Smith, in The Wealth of Nations, proposed that specialization in production leads to increased output. Smith believed that in order to meet a constantly growing demand for goods, a country's scarce resources must be allocated efficiently.
According to Smith's theory, a country that trades internationally should specialize in producing only those goods in which it has an absolute advantage—that is, those goods it can produce more cheaply than can its trading partners.
The country can then export a portion of those goods and, in turn, import goods that its trading partners produce more cheaply. Smith's work is the foundation of the classical school of economic thought.
According to Smith's theory, a country that trades internationally should specialize in producing only those goods in which it has an absolute advantage—that is, those goods it can produce more cheaply than can its trading partners.
The country can then export a portion of those goods and, in turn, import goods that its trading partners produce more cheaply. Smith's work is the foundation of the classical school of economic thought.
Modernization and Innovation of Trade Business
A nation possessing limited natural resources is able to produce and consume more than it otherwise could. The establishment of international trade expands the number of potential markets in which a country can sell its goods.
The increased international demand for goods translates into greater production and more extensive use of raw materials and labor, which in turn leads to growth in domestic employment. Competition from international trade can also force domestic firms to become more efficient through modernization and innovation.
Within each economy, the importance of foreign trade varies. Some nations export only to expand their domestic market or to aid economically depressed sectors within the home economy. Other nations depend on trade for a large part of their national income and to supply goods for domestic consumption.
In recent years foreign trade has also been viewed as a means to promote growth within a nation's economy. Developing countries and international organizations have increasingly emphasized such trade.
The increased international demand for goods translates into greater production and more extensive use of raw materials and labor, which in turn leads to growth in domestic employment. Competition from international trade can also force domestic firms to become more efficient through modernization and innovation.
Within each economy, the importance of foreign trade varies. Some nations export only to expand their domestic market or to aid economically depressed sectors within the home economy. Other nations depend on trade for a large part of their national income and to supply goods for domestic consumption.
In recent years foreign trade has also been viewed as a means to promote growth within a nation's economy. Developing countries and international organizations have increasingly emphasized such trade.
Emergence of Modern Foreign Trade
Although foreign trade was an important part of ancient and medieval economies, it acquired new significance after about 1500.
As empires and colonies were established by European countries, trade became an arm of governmental policy.
The wealth of a country was measured in terms of the goods it possessed, particularly gold and precious metals.
The objective of an empire was to acquire as much wealth as possible in return for as little expense as possible.
This form of international trade, called mercantilism, was commonplace in the 16th and 17th centuries.
International trade began to assume its present form with the establishment of nation-states in the 17th and 18th centuries.
Heads of state discovered that by promoting foreign trade they could mutually increase the wealth, and thus the power, of their nations.
During this period new theories of economics, in particular of international trade, also emerged.
As empires and colonies were established by European countries, trade became an arm of governmental policy.
The wealth of a country was measured in terms of the goods it possessed, particularly gold and precious metals.
The objective of an empire was to acquire as much wealth as possible in return for as little expense as possible.
This form of international trade, called mercantilism, was commonplace in the 16th and 17th centuries.
International trade began to assume its present form with the establishment of nation-states in the 17th and 18th centuries.
Heads of state discovered that by promoting foreign trade they could mutually increase the wealth, and thus the power, of their nations.
During this period new theories of economics, in particular of international trade, also emerged.
Foreign Trade
Foreign Trade, the exchange of goods and services between nations. Goods can be defined as finished products, as intermediate goods used in producing other goods, or as agricultural products and foodstuffs. International trade enables a nation to specialize in those goods it can produce most cheaply and efficiently.
Trade also enables a country to consume more than it would be able to produce if it depended only on its own resources. Finally, trade enlarges the potential market for the goods of a particular economy. Trade has always been the major force behind the economic relations among nations.
The largest trading community in the world began in Europe in 1948 with the founding of the customs union known as Benelux—Belgium, the Netherlands, and Luxembourg. In 1951 France, West Germany, and the Benelux countries formed the European Coal and Steel Community (ECSC).
These nations established the European Economic Community (EEC), often called the Common Market, in 1957. The ECSC, EEC, and other entities merged in 1967 to form the European Community (EC), which was succeeded in 1993 by the European Union.
Trade also enables a country to consume more than it would be able to produce if it depended only on its own resources. Finally, trade enlarges the potential market for the goods of a particular economy. Trade has always been the major force behind the economic relations among nations.
The largest trading community in the world began in Europe in 1948 with the founding of the customs union known as Benelux—Belgium, the Netherlands, and Luxembourg. In 1951 France, West Germany, and the Benelux countries formed the European Coal and Steel Community (ECSC).
These nations established the European Economic Community (EEC), often called the Common Market, in 1957. The ECSC, EEC, and other entities merged in 1967 to form the European Community (EC), which was succeeded in 1993 by the European Union.
Thursday, March 5, 2009
Investment Banking
Investment Banking, branch of finance concerned with the underwriting, distribution, and maintenance of markets in securities issued by business firms and public agencies. Investment bankers are primarily merchants of securities; they perform three basic economic functions:
(1.) provide capital for corporations and local governments by underwriting and distributing new issues of securities;
(2.) maintain markets in securities by trading and executing orders in secondary market transactions; and
(3.) provide advice on the issuance, purchase, and sale of securities, and on other financial matters. In contrast to commercial banks, whose chief functions are to accept deposits and grant short-term loans to businesses and consumers, investment bankers engage primarily in long-term financing.
In addition to departments handling the purchase and resale of new issues, an investment-banking house typically has a trading department, a brokerage department, and a research or statistical department.
The trading department buys and sells securities when profitable opportunities arise. Sometimes it may have to buy back securities it is marketing in order to prevent a decline in their market price.
The brokerage department buys and sells securities, at a commission, for the accounts of other investors. The research department supplies the firm and its customers with information about securities.
An important segment of investment-banking operations is carried on by government-bond dealers. A few dozen large investment houses and commercial banks, most of them headquartered in New York City, handle the bulk of trading in U.S. government securities.
(1.) provide capital for corporations and local governments by underwriting and distributing new issues of securities;
(2.) maintain markets in securities by trading and executing orders in secondary market transactions; and
(3.) provide advice on the issuance, purchase, and sale of securities, and on other financial matters. In contrast to commercial banks, whose chief functions are to accept deposits and grant short-term loans to businesses and consumers, investment bankers engage primarily in long-term financing.
In addition to departments handling the purchase and resale of new issues, an investment-banking house typically has a trading department, a brokerage department, and a research or statistical department.
The trading department buys and sells securities when profitable opportunities arise. Sometimes it may have to buy back securities it is marketing in order to prevent a decline in their market price.
The brokerage department buys and sells securities, at a commission, for the accounts of other investors. The research department supplies the firm and its customers with information about securities.
An important segment of investment-banking operations is carried on by government-bond dealers. A few dozen large investment houses and commercial banks, most of them headquartered in New York City, handle the bulk of trading in U.S. government securities.
Margin Deals
Margin Deals, in finance, transactions in which a purchaser buys securities by paying a percentage of the price and pledging the securities to guarantee payment of the balance of the price.
For example, an investor pays a broker a specified sum (margin) toward the purchase of shares of stock.
The broker advances as a loan the remainder of the money needed to purchase the shares.
If the price of the stock remains constant or rises, the broker's loan is protected.
If the price begins to fall, the broker notifies the investor that the stock will be sold unless an additional margin is advanced.
For example, an investor pays a broker a specified sum (margin) toward the purchase of shares of stock.
The broker advances as a loan the remainder of the money needed to purchase the shares.
If the price of the stock remains constant or rises, the broker's loan is protected.
If the price begins to fall, the broker notifies the investor that the stock will be sold unless an additional margin is advanced.
IPO's and the Secondary Market
Corporations issue new securities in what is known as the primary market, usually with the help of investment bankers. The investment bank acquires the initial issue of the new securities from the corporation at a negotiated price and then makes the securities available for its clients and other investors in an initial public offering (IPO).
In this primary market, corporations receive the proceeds of security sales. After this initial offering the securities are bought and sold in the secondary market. The corporation is not usually involved in the trading of its stock in the secondary market. Stock exchanges essentially function as secondary markets.
By providing investors the opportunity to trade financial instruments, the stock exchanges support the performance of the primary markets. This arrangement makes it easier for corporations to raise the funds that they need to build and expand their businesses
In this primary market, corporations receive the proceeds of security sales. After this initial offering the securities are bought and sold in the secondary market. The corporation is not usually involved in the trading of its stock in the secondary market. Stock exchanges essentially function as secondary markets.
By providing investors the opportunity to trade financial instruments, the stock exchanges support the performance of the primary markets. This arrangement makes it easier for corporations to raise the funds that they need to build and expand their businesses
Computerized Transfer of Ownership
Most of the world’s major exchanges have become highly efficient, computerized organizations. Each has a charter for regulating operations and some are integrated within regional economic unions.
For instance, the EU was instrumental in organizing the EASDAQ and drafted its charter.
In addition, exchanges now trade securities from companies around the world.
Computerization has enabled brokers to instantaneously monitor activities on foreign exchanges.
Many exchanges also list indexes and averages—such as the Nikkei 225 Stock Average of the Tokyo Stock Exchange (TSE) and the Financial Times Stock Exchange 100 of the LSE—that are closely followed by options and futures investors.
For instance, the EU was instrumental in organizing the EASDAQ and drafted its charter.
In addition, exchanges now trade securities from companies around the world.
Computerization has enabled brokers to instantaneously monitor activities on foreign exchanges.
Many exchanges also list indexes and averages—such as the Nikkei 225 Stock Average of the Tokyo Stock Exchange (TSE) and the Financial Times Stock Exchange 100 of the LSE—that are closely followed by options and futures investors.
Stock Trading
Stocks are shares of ownership in companies. People who buy a company’s stock may receive dividends (a portion of any profits).
Stockholders are entitled to any capital gains that arise through their trading activity—that is, to any gain obtained when the price at which the stock is sold is greater than the purchase price.
But stockholders also face risks. One risk is that the firm may experience losses and not be able to continue the payment of dividends.
Another risk involves capital losses when the stockholder sells shares at a price below the purchase price.
Stockholders are entitled to any capital gains that arise through their trading activity—that is, to any gain obtained when the price at which the stock is sold is greater than the purchase price.
But stockholders also face risks. One risk is that the firm may experience losses and not be able to continue the payment of dividends.
Another risk involves capital losses when the stockholder sells shares at a price below the purchase price.
Bonds Finance
From an investor's perspective, stocks offer a higher potential return if profits rise, but bonds are generally a safer investment.
Stock dividends are paid out of company profits, while bond interest payments are made even if the company is losing money.
If a corporation goes bankrupt, bondholders must be paid before stockholders. Nonetheless, risks are associated with investing in bonds.
Because most bonds offer a fixed rate of return, a bond with a low coupon rate will be less valuable if interest rates rise to the point that the investor's money could be more profitably invested elsewhere.
If the inflation rate rises in relation to the coupon rate, the value of the investor's return will be reduced.
Stock dividends are paid out of company profits, while bond interest payments are made even if the company is losing money.
If a corporation goes bankrupt, bondholders must be paid before stockholders. Nonetheless, risks are associated with investing in bonds.
Because most bonds offer a fixed rate of return, a bond with a low coupon rate will be less valuable if interest rates rise to the point that the investor's money could be more profitably invested elsewhere.
If the inflation rate rises in relation to the coupon rate, the value of the investor's return will be reduced.
Federal Reserve Bank Stock
At the base of the Federal Reserve System are the member commercial banks.
All national, or federally chartered, banks are required to join the system; membership of state-chartered institutions is voluntary.
Members have to purchase capital stock in their district Federal Reserve bank in the amount of 6 percent of their capital, excluding retained earnings, and get the right to vote for six of the nine directors of that district bank.
Stock ownership does not convey control or the financial interest normally attached to stock in a corporation. The stock may not be sold or used as collateral and must be returned to the district reserve bank if the commercial bank ceases to be a member.
All national, or federally chartered, banks are required to join the system; membership of state-chartered institutions is voluntary.
Members have to purchase capital stock in their district Federal Reserve bank in the amount of 6 percent of their capital, excluding retained earnings, and get the right to vote for six of the nine directors of that district bank.
Stock ownership does not convey control or the financial interest normally attached to stock in a corporation. The stock may not be sold or used as collateral and must be returned to the district reserve bank if the commercial bank ceases to be a member.
Power of Government to Regulate
The precise scope of police power is difficult to define.
It covers, for example:
It covers, for example:
- The maintenance of the peace by the police.
- The licensing of some trades and professions.
- The regulation of rates charged by public service corporations.
- The regulation of security issues by so-called Blue Sky laws, which are statutes intended to prevent fraud in the sale of stocks and bonds.
- The regulation of hours of labor; and such health regulations as quarantine and compulsory vaccination.
Federal Reserve Regulation
The Federal Reserve also has a narrow role in regulating operations of the stock market.
It may selectively lower or raise the margin requirement, which is the percentage of a stock price that must be provided in cash by someone who buys the stock on credit.
The margin requirement, a legacy of depression legislation, aims to curb market speculation.
It may selectively lower or raise the margin requirement, which is the percentage of a stock price that must be provided in cash by someone who buys the stock on credit.
The margin requirement, a legacy of depression legislation, aims to curb market speculation.
Finance and the stock exchange
A wide variety of financial institutions have different roles in finance and the economy. Some institutions, such as banks, link lenders and borrowers.
These institutions act as an intermediary among consumers, businesses, and governments by lending out deposits.
Other institutions, such as stock exchanges, provide a market for existing securities, which include stocks and bonds.
Stock exchanges encourage investment because they enable investors to sell their securities when the need arises.
These institutions act as an intermediary among consumers, businesses, and governments by lending out deposits.
Other institutions, such as stock exchanges, provide a market for existing securities, which include stocks and bonds.
Stock exchanges encourage investment because they enable investors to sell their securities when the need arises.
Stock Split
Stock Split, an increase or decrease in the number of shares of stock issued by a corporation. When corporations issue a stock split, they change the value of the stock in proportion to the change in the number of shares so that the total value of the stock remains the same.
Many stock splits are 2 for 1—that is, investors get two shares of stock for each share they own.
For example, an investor who held 100 shares of General Electric with a value of $120 a share prior to a 2 for 1 stock split, would hold 200 shares with a value of $60 a share after the split. Companies sometimes issue stock splits to lower the price of their stock if they believe that a lower price will entice more investors to buy the stock.
A corporation may also issue a reverse stock split in which the number of shares is cut in half, but the value of each share is doubled. In a reverse split, 100 shares of stock with a value of $5 a share would become 50 shares with a par value of $10 a share.
Reverse stock splits raise the price of the stock and are most common with low priced stocks. A company might make a reverse split to increase the price per share to meet the requirements for listing the stock on a stock exchange.
Splits and reverse splits may be made in any amount. Occasionally, a company will make splits in the amount of 3 for 1, 4 for 1, or even 10 for 1.
Many stock splits are 2 for 1—that is, investors get two shares of stock for each share they own.
For example, an investor who held 100 shares of General Electric with a value of $120 a share prior to a 2 for 1 stock split, would hold 200 shares with a value of $60 a share after the split. Companies sometimes issue stock splits to lower the price of their stock if they believe that a lower price will entice more investors to buy the stock.
A corporation may also issue a reverse stock split in which the number of shares is cut in half, but the value of each share is doubled. In a reverse split, 100 shares of stock with a value of $5 a share would become 50 shares with a par value of $10 a share.
Reverse stock splits raise the price of the stock and are most common with low priced stocks. A company might make a reverse split to increase the price per share to meet the requirements for listing the stock on a stock exchange.
Splits and reverse splits may be made in any amount. Occasionally, a company will make splits in the amount of 3 for 1, 4 for 1, or even 10 for 1.
Stock Options
Stock Option, an option or right to buy or sell stock at a specified price, usually within a specified period of time. The buyer of a stock option can choose to take action on the option—that is, to exercise it—within the specified period of time or to not take action and let the option expire.
Sometimes the term stock option refers specifically to options that a company grants its employees as compensation in addition to their salaries.
For example, a company may give an employee stock options that allow the employee to buy 100 shares of company stock at the present-day price of $40 per share at any time within the next ten years.
If the stock should rise to $50 per share, the employee can choose to exercise the option—that is, put it into effect. The employee can then buy 100 shares of company stock at $40 per share for $4000. The employee can either hold onto the stock or sell it at $50 per share for $5000, for a profit of $1000.
If the stock price should fall, the employee is not obligated to buy the stock at $40 per share. Stock options are becoming a common way for companies to reward their employees.
Sometimes the term stock option refers specifically to options that a company grants its employees as compensation in addition to their salaries.
For example, a company may give an employee stock options that allow the employee to buy 100 shares of company stock at the present-day price of $40 per share at any time within the next ten years.
If the stock should rise to $50 per share, the employee can choose to exercise the option—that is, put it into effect. The employee can then buy 100 shares of company stock at $40 per share for $4000. The employee can either hold onto the stock or sell it at $50 per share for $5000, for a profit of $1000.
If the stock price should fall, the employee is not obligated to buy the stock at $40 per share. Stock options are becoming a common way for companies to reward their employees.
Issuing New shares
An existing corporation that wants to secure funds to expand its operations has three options. It can issue new shares of stock, using the process described earlier.
That option will reduce the share of the business that current stockholders own, so a majority of the current stockholders have to approve the issue of new shares of stock.
New issues are often approved because if the expansion proves to be profitable, the current stockholders are likely to benefit from higher stock prices and increased dividends.
Dividends are corporate profits that some companies periodically pay out to shareholders.
That option will reduce the share of the business that current stockholders own, so a majority of the current stockholders have to approve the issue of new shares of stock.
New issues are often approved because if the expansion proves to be profitable, the current stockholders are likely to benefit from higher stock prices and increased dividends.
Dividends are corporate profits that some companies periodically pay out to shareholders.
How stock price is determined
The price of a stock depends on the market forces of supply and demand. With companies issuing only a limited number of shares, price is determined by demand.
An increase in demand will raise the price whereas a decrease in demand will lower the price. Normally the demand for a particular stock depends on expectations regarding the profits of the corporation that issued the stock.
The more optimistic these expectations are, the greater the demand will be and, therefore, the greater the price of the stock
An increase in demand will raise the price whereas a decrease in demand will lower the price. Normally the demand for a particular stock depends on expectations regarding the profits of the corporation that issued the stock.
The more optimistic these expectations are, the greater the demand will be and, therefore, the greater the price of the stock
Wednesday, February 18, 2009
Business Stocks
Stock (business), in business and finance, a share of ownership in a corporation. Shares in a corporation can be bought and sold, usually on a public stock exchange. Consequently, the owner of shares can realize a profit or capital gain if the stock is sold at a price above what the owner originally paid for it.
Some companies enable stockholders to share in the profits of the company. These payments of corporate profits to stockholders are called dividends. In addition to having a claim on company profits, stockholders are entitled to share in the sale of the company if it is dissolved.
They may also vote in person or by proxy on a variety of corporate matters, including the most important matter of who should run the corporation. When the company issues new stock, stockholders have priority to buy a certain number of shares before they are offered for public sale.
Stockholders also receive periodic reports, usually quarterly, that provide information regarding the corporation’s business performance. Stocks generally are negotiable, which means stockholders have the right to assign or transfer their shares to another individual.
A stockholder is considered a business owner and has the protection of limited liability under United States laws. Limited liability means that a stockholder is not personally liable for the debts of the corporation.
The most a stockholder can lose if the company fails is the amount of his or her investment—what he or she originally paid for the stock. This arrangement differs from that of other forms of business organization, which are known as sole proprietorships and partnerships. These business owners are personally liable for the debts of their businesses.
Some companies enable stockholders to share in the profits of the company. These payments of corporate profits to stockholders are called dividends. In addition to having a claim on company profits, stockholders are entitled to share in the sale of the company if it is dissolved.
They may also vote in person or by proxy on a variety of corporate matters, including the most important matter of who should run the corporation. When the company issues new stock, stockholders have priority to buy a certain number of shares before they are offered for public sale.
Stockholders also receive periodic reports, usually quarterly, that provide information regarding the corporation’s business performance. Stocks generally are negotiable, which means stockholders have the right to assign or transfer their shares to another individual.
A stockholder is considered a business owner and has the protection of limited liability under United States laws. Limited liability means that a stockholder is not personally liable for the debts of the corporation.
The most a stockholder can lose if the company fails is the amount of his or her investment—what he or she originally paid for the stock. This arrangement differs from that of other forms of business organization, which are known as sole proprietorships and partnerships. These business owners are personally liable for the debts of their businesses.
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