So what is Forex? Forex is actually a word that stands for the foreign exchange market, and other words to name the same thing are FX or just the currency market. The Forex market is a global, decentralized and financial market that is based on the concept of trading currencies. What happens is that economic centers across the whole planet operate like anchors of trading between a vast array of various kinds of purchasers and sellers, 24 hours a day. The only time that is the exception is on the weekend. The Forex actually is responsible for deciding the relative values of the various currencies around the world.
By way of currency conversions, the Forex helps out international investment as well as trade. One example that can illustrate this is the following. Let us say that a company in the U.S. wants to import some goods. Well, the Forex allows such a company in the U.S. to import said goods from another company in the U.K. while only paying pound sterling. This is in spite of the fact that the U.S. company’s income is actually in American dollars. In this way, the Forex is actually very flexible and therefore helps out international trade as well as investment. Another thing this foreign exchange market enables is the speculation of the various values of different currencies and also the carry trade, which is the direct speculation upon the variation of the interest rates between two currencies. The routine transaction in this foreign exchange market occurs this way. One party buys up a certain quantity of just 1 currency by paying a quantity of yet another currency.
How Forex Trading is Unique
The Forex, in the sense of the modern foreign exchange market, started to be established in the decade of the 70s after about 3 decades of government restrictions against transactions that involved foreign exchange. As such, the Forex is unique when compared to other markets in the following, key ways:
- It is a market that features a tremendous trading volume that represents the biggest asset class on the planet that leads to great liquidity.
- It is a market that features a great deal of dispersion from a geographical standpoint alone.
- It is a market that is defined by ongoing operation because it trades every hour of every day except for the weekends.
- It is a market that is influenced by the multitude of aspects that can have an impact on the level of exchange rates.
- It is a market that is characterized by relatively low margins of relative profit when you compare it to other kinds of markets of fixed income
- It is a market that utilizes leverage in order to raise profit and also loss margins with regard to the account size
All of these features have led some observers to call the Forex the market that is nearest to the ideal of perfect competition. Perfect competition is defined as a market in which no one, single participant is huge enough to possess the market power to single-handedly determine the price of a homogenous item. This is based on a definition in economic theory.
If you are wondering what specific location the Forex trades in, just stop wondering! The Forex actually has no central location because of its international nature. Any small trades are simply executed by the brokerages, and the various types of currencies that are traded on the foreign exchange market are exchanged by the banks. Though the trading of various kinds of currencies is a worldwide phenomenon, the plurality of trading on the Forex actually takes place in the city of London, with some 35 percent of trades occurring there. Behind London—though quite far behind London, actually—are New York and Tokyo, with New York accounting for only 17 percent of the trades on the Forex and Tokyo being accountable for only 6 percent.
The Most Popular Currencies for Forex Trades
While a lot of various kinds of currencies are traded on this global market, it is a fact that only a few currencies are the most popularly and widely traded currencies. In order of descending popularity, the most popular currency traded on this foreign exchange market is the U.S. dollar, the second-most popular currency traded on the market is the Euro, the third-most popular currency traded is the Japanese yen, the fourth-most popular currency that is traded on the Forex is the pound sterling of the U.K. and the final currency on this list is the Swiss franc. The U.S. dollar is known to influence the foreign exchange market the most by far, with 80 percent of all currency trades being known to involve the U.S. dollar.
If you are an average Joe who is flirting with the notion of beginning investing in the Forex, a good piece of advice is to first familiarize yourself with how this volatile market operates. There are a lot of risks for first-time traders on this foreign exchange market. Some people believe that the opportunity for losing money is even greater than the chance to make money. This can all be attributed to the fact that the foreign exchange market is a huge market that comes with a lot of liquidity as well as a lot of volume. In addition to those factors, the Forex is susceptible to world events that can rock it at any time. Examples of news items that can rock it are those related to geopolitics, the economic prognoses of various countries and even natural disasters.
As you can see, the Forex market is not your conventional market because it trades world currencies and not companies like, for instance, the New York Stock Exchange does. It is also unique in that it is open every single hour of every day during the week, again, unlike a major stock exchange such as the New York Stock Exchange. Because of these unique aspects of the Forex, it can be risky for new investors to jump into it, which is why they are advised to be conservative when first starting out on it.