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What is Forex?
from: Francis GillenIf you read about investing, you've seen the word forex pop up.
But because forex doesn't get much publicity in the major
publications and websites, many investors don't know that forex
is just short for "foreign exchange." So trading the forex
market is simply trading foreign currencies. As recently as ten
years ago, currency trading had high barriers to entry, so only
large banking and institutional firms had access to the tools
and systems required to play in the forex game. Recently,
however, technology has developed to the point that any
individual investor can hop right in and trade with one of the
many online platforms.
When buying and selling in the forex market, you'll see that
there are four "currency pairs" that dominate the percentage of
trades. Those four are the Euro vs U.S. Dollar, US Dollar vs
Japanese Yen, US Dollar vs Swiss Franc, and US Dollar vs British
Pound.
The goal when investing in currency is to be holding a currency
that appreciates in value in relation to the other currencies.
To use an overly simplistic example, if you bought 50 British
Pounds for 100 US Dollars, held the Pounds for 1 week, and in
that period the value of Pounds increased in relation to US
Dollars, you could then convert those Pounds back into dollars
for, say, $120.
Unlike the domestic stock markets, the forex is open for trades
24 hours a day. Much like the phrase "it's always noon
somewhere," it's always business hours at some region of the
globe. Since every country trades on the FX market, and it's
open all day, the daily volume is roughly $1.2 trillion, which
dwarfs that of the NYSE. Another comparison to make in order to
truly realize the magnitude of the forex market is with the
currency futures market (which has around 1% of the daily
volume).
One other important distinction to make is that currency trading
is not centered on an exchange like the NYSE or NASDAQ. There is
no central body or organization required to act as middleman.
Trading circulates between major banking centers around the
world.
Until recently, there were strict financial requirements and
massive minimum transaction sizes which prevented individual
investors from trading. But with the advent of the internet came
the FX brokers. A forex broker is similar to an online stock
trading account such as etrade. Anybody can open an account and
buy and sell in any quantity. Because the brokers have thousands
of investors placing orders through them, they are able to meet
the large minimum transaction size by purchasing in large blocks
and distributing currency amongst the purchasing investors.
Although it is now easy to start trading forex, it is a
complicated and complex market. While it offers fantastic
opportunity for wealth, it is also very easy to lose your shirt
in a hurry. Before trading forex, do your homework and read as
much as you can find before investing your hard earned money.
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