Trading stocks at the Market Open

Sometimes you discover a stock overnight that you would really like to own. Perhaps there was good news that you expect will cause it to go higher. Many people will place a market order to buy the stock the next day. If this order is placed, it will go into a queue of orders to buy that stock at 9:30 AM EST the next morning. All of the overnight buy at market orders accumulate so that the next day at the open there is often huge demand to buy the stock. Since the pent up overnight demand is so high, people that want to sell the stock can demand much higher prices. Thus the stock will open at a very high price and climb higher until all of the overnight demand is exhausted. When you place an order to buy at market you have no control over what price you will pay as the price climbs higher. Often times the price will then decline as the buying demand is exhausted, so you will not have gotten the stock at the best price.

A better strategy is to wait until 10:30 AM to place an order to buy the stock. Placing a market order at 10:30 AM is safer than at the open. By 10:30 the demand will have stabilized. It is also safer to place a market order with a stock that trades in high volumes each day and has a small bid / ask spread. It is usually preferable to place a limit order rather than a market order so that you know what price you will pay, but market orders are fine when the bid ask spread is small and the trading volumes are high in a stock (1 million shares or more per day).

The US Dollar and international currencies

The world's most common currency / monetary unit is the US dollar. I would define "most common" to mean most widely accepted form of currency. Many goods are priced internationally in dollars - for example oil is priced in US dollars even though most of it is produced outside of the US.

Some would argue that different currencies in the world don't matter and that we should just have one common form of currency, and that would simplify things. However, this cannot work, because when the U.S or any country controls its own currency, it can control the money supply and interest rates within its country. Using a single global currency would cause sovereign countries to give up control over interest rates and therefore they would be unable to fight inflation or grow their economies as needed.

There are many countries in the world that have eliminated their own currencies and just use US dollars (for instance Panama). This is because those countries could not keep inflation under control and stabilize their currencies or their economies, so they have tied their economic stability to the US Federal Reserve and its decisions. For many smaller non-economically powerful nations, this is very beneficial because it removes the ability of their governments to just print money and create massive inflation.

How FOREX Currency Exchange works

How are FOREX currency exchange rates and prices determined? On the foreign currency exchange markets, currencies are always traded in pairs relative to each other. For example the US Dollar (symbol USD) and Japanese Yen (symbol JPY) trade as a pair called the USD/JPY. Forex transactions are quoted in pairs because you are buying one currency while selling another. The price of the USD/JPY shows how many of the second currency (JPY or Japanese Yen) can be bought with one unit of the first currency (e.g. one US Dollar). So if the USD/JPY is quoted as bid 119.85, ask 119.89 it means you can buy 119.89 yen for one dollar or sell 1 dollar for 119.85.

The price level for any currency pair is not set by mutual agreement between countries. This is completely incorrect. Price levels are determined strictly strictly by supply and demand for one currency relative to another in the huge international interbank market. This is a market for huge international institutions and corporations to convert currencies from one form to another. For example an American company selling goods in Japan may eventually want to convert the Japanese Yen that they earned into dollars so that they can pay their American stockholders dividends in dollars or to invest in a new plant in the US. Financial institutions trading currencies on interbank may also speculate on the direction that currency prices will move based on political news or world economic news. The more that these institutions want to convert other currencies to dollars, the stronger the dollar will get, and its price relative to another currency will rise due to the demand. The dollar will fall when the demand for dollars shrinks relative to other currencies.

On the interbank system the spread between the bid and ask is quite a bit lower than the spread that the retail investor will see. Retail investors (ordinary people), cannot trade currencies on interbank. They typically trade currencies online (on the internet) in the Off Exchange Currency Market. These are not traditional markets because there is no exchange. When you sign up to trade FOREX you are actually trading with a dealer. That dealer can set their own bid / ask spread wherever they want. So if the interbank spread is only 2 pips (e.g USD/JPY 119.86/119.88), the dealer might show a spread of 119.84 / 119.90. The dealer makes money by selling the retail investor at 119.90 and buying from the investor at 119.84. The bigger the spread, the more profit the dealer makes, and the harder it is for the investor to make money. Shop around and compare spread rates and commissions when looking to trade FOREX. Remember you are not actually trading with the whole world you're trading with a dealer. There are no regulatory rules about how much a dealer can charge.