Forex - Foreign Currency Exchange
The Forex market is the largest financial market in the world participated in by a huge volume of traders who buy and sell currencies. Daily currency trading transactions amount to US$3 trillion, a far cry from the combined volume of transactions in equity markets at only US$30 billion.
Previously, participation was only limited to banks, hedge funds and major currency dealers. But with the persistence of small financial institutions and the advent of the internet, the foreign exchange market has allowed the trading of currencies at the retail level. With the internet and the development of various proprietary software, numerous interested traders around the globe can now take part in the Forex market.
How it works
Foreign exchange takes place 24 hours a day, five times a week. Currencies that are commonly traded include the Japanese Yen, US Dollar, Euro, Swiss Franc, Canadian Dollar, British Pound and Australian Dollar. They are also called by trader as the majors and account for more than 85 percent of the daily Forex transactions.
It is a standard procedure that currencies are traded in pairs. For example, the Japanese Yen is paired with the US Dollar, the Euro with the English Pound. If an investor, for instance, feels that the US Dollar''s value will increase against the Yen, he or she will likely sell Yen and buy US Dollars.
With the movement of currencies, profit is always possible even if there''s only a small change. This is so because in every transaction, huge amounts of money are involved.
Where it occurs
Forex does not involve any central exchange unlike other financial markets which trade in a specific location. Instead, several trading centers around the world exist notably in London, Tokyo, Singapore, New York and Hong Kong. Some 5,000 trading institutions are involved in Forex such as international banks, commercial companies, government banks and brokers for the various types of foreign currency exchange.
Complete Forex trading is done electronically either via the telephone or the internet. Online trading over the internet is now the most popular form of Forex trading today. This technology is an advantage because apart from the convenience it provides, it has also lowered transaction costs. Another benefit is its transparency attributed to the development of online trading platform.
The foreign exchange market is dynamic and will remain so. It is also stable despite the sudden falls it experiences every now and then. This is because when the value of one currency falls, what happens is the value of the other currency normally rises.
High liquidity is another advantage of the Forex market. Compared to the New York Stock Exchange, the daily trading volume in the Forex market is estimated to be 50 times more. Additionally, there will always be traders taking part in the buying and selling of foreign currencies resulting in extreme liquidity and price stability.