forex

Banking Terms -> forex

• Forex, also called currency market, foreign exchange market, and FX, is a decentralized currency trading market, functioning on a global scale. Financial centers around the globe serve as the meeting point of various sellers and buyers, with forex determining the relative values of various currencies. The main purpose of the currency market is to facilitate investment and global trade as it allows companies to convert currencies.
  
  The foreign exchange market is a place where participants exchange, sell, buy, and speculate on different currencies. Generally, this market is comprised of central banks, banks, investment management firms, and commercial companies. Investors, retail forex brokers, as well as hedge funds participate on it. With such a variety of participants, the foreign exchange market is regarded as the biggest financial market around the globe.
  
  Currency markets are considered to be efficient because they are liquid and large. It should be noted, however, that forex is not a single exchange. The foreign exchange market connects participants from all over the world via a network of computers. With its help, convertible currencies are bought and sold, and conversion rates are determined. A huge volume is traded every day, and only fifteen percent of it is traded for services and goods.
  
  The way the foreign exchange market functions is simple to understand. It you buy a currency when it is low and then sell it when it is high, you will make money, profiting from your investment. The tricky part is to know what factors have impact on the currency market, what moves it, and what direction it is going to move next.
  
  The foreign exchange market is open 24/7 unlike other financial markets. So, investors are not concerned with when the market will open. With four trading sessions around the world, however, it is a good idea to monitor it only when the busiest sessions take place. These are the sessions in London and New York. It is recommended to buy and sell currencies when both sessions overlap because the foreign exchange market moves a lot then. At the same time, the foreign exchange market is a busy place even during one of the sessions. Trading takes place only on working days because weekends are officially market holidays.
  
  Many dealers on the currency market offer leveraged trading. Leverage is a type of lending, with dealers multiplying investments so that even small moves in rates can bring investors considerable profits. At the same time, beginner investors should be careful because this type of trading is a risky business compared to unleveraged trading.
  
  The currency market is unique because of its features. Due to the large volume of trade, the forex market is quite liquid. Its continuous operation and geographical dispersion contribute to the currency market’s uniqueness. Moreover, a number of factors have impact on exchange rates. The currency market also offers low margins of profit unlike markets that offer fixed income.
  
  The trading of forex derivative products, such as options on currency futures and currency futures is allowed in most developed countries. These states have capital accounts, which are fully convertible. Trading forex derivative products is not permitted in some emerging countries as to ensure control over their capital accounts. Other states have controls over their capital accounts but have allowed currency futures exchanges to be established. Among them are South Africa, Korea, and India.
  
  It should be noted that up to 90 percent of transactions on the foreign exchange market are speculative. In other words, traders only speculate on the movement of currencies. Of all participants, hedge funds are notorious for currency speculation, due to their ability to borrow huge amounts of money, preventing central banks’ interventions in support of any currency.

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