What is Forex?

What is Forex?

If you read about investing, you've seen the word forex pop-up. But because the exchange rate is not much publicity in major publications and websites, many investors do not know that forex is just short for "foreign currency." 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 the forex game. Recently, however, the technology is developed to such an extent that every individual investor can hop right in and trade with one of the many online platforms.

When buying and selling foreign exchange market, you will see that there are four "currency pairs" that dominate the percentage of trades. Those four are the Euro vs. U.S. Dollar, U.S. Dollar vs Japanese Yen, U.S. dollar versus the Swiss franc and U.S. dollar versus the British pound.

The goal when investing in currency is to hold a currency that appreciates in value against other currencies. To use overly simplistic example, if you bought 50 British Pounds for 100 U.S. dollars, held in pounds for 1 week, and during that period increased value of the pound against the U.S. dollar, then I can convert back into those pounds for dollars, say, $ 120.

Unlike the domestic stock markets, the Forex is open for trades 24 hours a day. Much like the phrase "it is always noon somewhere," it's always business hours in some parts of the globe. Since every country trades on the foreign exchange market, and is open every day, one day is about $ 1200000000000 that dwarfs that of the NYSE. Another comparison can be done in order to truly grasp the size of the Forex market with currency futures market (which has about 1% of daily volume).

Another important difference is that to make currency trading is not centered on an exchange like the NYSE or LSE. There is no central authority or organization should act as an intermediary. 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 FX brokers. A forex broker is similar to online stock trading account as Etrade. Anyone can open an account and buys and sells in any quantity. Because brokers have thousands of investors placing orders through them, they are able to meet the large minimum transaction size by purchasing large blocks and distributing currency between buying investors.

Though it's easy to start trading forex, it is complicated and complex market. While it offers a 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 you invest your hard earned money.



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