What is Foreign Exchange (Forex)?
February 11, 2011 5:01 AM EST
When someone mentions Foreign Exchange (Forex) market, the usual image that immediately comes to mind is a person waiting behind a counter while a clerk just behind the parting glass counts and changes your local currency into US Dollars.
At some point either when travelling or making an overseas purchase, most people would have in some way participated in the FX market. However, it is more than currency conversion. Increasingly many are now turning to the FX market for the purposes of speculation or dealing at prices formerly only available to financial institutions.
So what is Foregn Exchange all about? As defined in The Economist's Guide to Financial Markets, foreign exchange, more popularly referred to as "forex" is a worldwide decentralized over-the-counter financial market for the trading of currencies, wherein financial centers around the globe serves as anchors of trading between a wide range of different types of buyers and sellers 24 hours a day, five days a week.
According to The Economist, foreign exchange market is arguably the world's largest market place. It has an average daily turnover of US$1.9 trillion, with some other sources such as GO Markets's Intoduction to Foreign Exchange estimating the market to have an average daily turnover in excess of US$4 trillion. The Bank for International Settlements says that average daily turnover in global foreign exchange markets is estimated at $3.98 trillion as of April 2010, which is a growth of more or less 20% over the $3.21 trillion daily volume in the same month back in 2007. Bottomline is foreign exchange has a huge turnover.
One of the prime advantages to trading foreign exchange is the sheer volume of geographically-dispersed market participants. This in turn creates liquidity which cannot be matched by any regulated exchange-traded product or instrument. According to a Wikipedia entry, this liquidity unique to foreign exchange markets along with other characteristics is the reason why it has been referred as the closest ideal of perfect competition.
Now that you know what Foreign Exchange market is all about, you might ask: How do you trade in Forex? In theory the buying and selling of currencies is extremely simple. A trader can buy low, sell high and vice- versa. However, in practice learning the basics is essential before putting your hard earned cash on the line.
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