Personal Finance and Investment

What Is FOREX? - PART 1

The Foreign Exchange market, which is also known as the FX market or just Forex) is the world biggest financial market, with over 1.5 trillion dollars changing hands daily.

That exceeds all US Treasury and Equity markets taken together!

As opposed to other financial markets, which function at a centralized location (e.g., stock exchange), there is no central location for the Forex market. This is because Forex is a worldwide electronic network of financial  institutions, banks and single traders, all engaged in the selling and purchasing of national currencies. Another highly important feature of the FX market is that it functions 24-hours a day, determined by the opening and closing hours of financial centers in various countries around the world, with day beginning in Sydney, then Tokyo, then London and finally New York. At any time of the day, in every place of the world, there are sellers and buyers that make Forex the most flexible currency market in the world.

By tradition, the right to trade in the Forex market has been granted only to banks and other big financial organizations. As technology progressed over the years, the Forex market has become accessible to everyone, from large banks to finance managers to single traders selling retail accounts. The time to join into this exciting, global trading market has never been better than today. Sing up for an account and become an active trader in the leading market on the planet.

The FX Market is quite different from exchanging currencies on the futures market and, at the same time, much easier than trading commodities or stocks.

Whether you know this or not, you are already playing a part in the Forex market. The mere fact that you’ve got money (particularly, US Dollars) in your pocket makes you a currency investor. By holding currency in US Dollars, you have chosen not to keep any other national currencies. Bonds, stocks or other investments you made, together with the money you deposited in your bank, are investments, which heavily rely on the stability of the US Dollar as their denominated currency. However, as the value of the US Dollar changes, causing fluctuations in the exchange rates, so does the value of your investments, influencing your financial status. Having this in mind, it is not surprising at all that a lot of investors have availed themselves of the variations in Exchange Rates, using the fluctuations in the market of the Foreign Exchange as a way to boost their capital.

Consider an example: Let’s say you had $1600 and purchased Euros when the exchange rate was 1.60 dollars to the Euro. You would then get 1000 Euros. If then the value of Euros vs. the US dollar has risen, you could trade your Euros for US dollars and get more dollars than you originally had.

Another example:

Suppose you see the following:

EUR/USD last trade was 1.60, meaning that 1 Euro is worth $1.60 US dollars.

The first currency (in our example, it’s EUR) is called the base currency, whereas the second one (USD) is referred to as the counter or quote currency.

The FOREX plays a crucial role in the economy of the world, as a huge need for currency exchange will always exist. International trade grows as communication and technology progress. Provided that international trade exists, there will always be a need for a FOREX market. The Forex market must exist in order to enable European countries like France to sell their products in the USA and obtain Euros in exchange for the US Dollars.

RISK WARNING:

Margined currency trading is a highly risky type of investment and is only appropriate for individual traders and financial institutions capable of surviving the potential losses it involves. Having an account with a broker gives you an opportunity to trade foreign currencies on a highly powered basis; it may increase available funds up to 400 times of your account equity).

However, if an account holder is trading at maximum leverage, he may lose his funds completely if the position(s) held in the account fluctuate(s) in value even as little as one percent. As there is a possibility of forfeiting your whole investment, operations on the market of foreign exchange should only be performed with risk capital, which, if lost, will not considerably shatter financial well-being of the investor.