Discover the returns possible in the world’s largest financial market. The Foreign Exchange market, also referred to as Forex or FX, is the largest financial market in the world, with a volume of more than $5 trillion a day. It was established in 1971 with the abolition of fixed currency exchanges. It is just over the past few years that private investors, such as yourself, have been able to participate in this market. Any person, firm, or country may trade in the Forex market. If you compare its trading volume to that of the New York Stock Exchange, it is well over 80 times bigger.
What is traded on the Foreign Exchange? The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer. Because you are not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy, compared to the other countries’ economies.
Unlike other financial markets, the Forex market has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter or ‘Interbank’ market, due to the fact that the entire market is run electronically, within a network of about 5000 trading institutions such as international banks, central government banks like the US Federal Reserve, and commercial companies and brokers. Major trading centers are located in New York, Tokyo, London, Hong Kong, Singapore, Paris, and Frankfurt, and all trading is by telephone or over the Internet. Businesses use the market to buy and sell products in other countries, but most of the activity in Forex is from currency traders who use it to attempt to generate profits from small movements in the market.
The most often traded or ‘liquid’ currencies are those of countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily transactions involve trading of the major currencies, including the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social, and political events at the time they occur – day or night, because the Forex market operates 24 hours a day.
Whether the market is moving up or down there is always potential for profit.
The transformation of the world economy into a global dimension and the dawn of technological advancement create unprecedented opportunities, particularly with the emergence of new markets with considerable growth potential. This scenario likewise underscores the fact that up-to-date information in this modern age is a valuable commodity made possible by breakthroughs in information technology. Now world events are digested in a matter of seconds providing the backbone for vital investment decision making. Among the most dynamic of the markets which is highly sensitive to political and economic changes is the Foreign Exchange market.
Whether we like it or not, radical changes in Forex exchange rates affect an individual’s or institution’s overall investment portfolio. If your holdings are all in US Dollars, you have chosen to hold the dollar and give up other major currencies. Indirectly, this makes you a currency investor. By investing in, and with, the US currency, then your portfolio becomes dependent on the integrity and value of the US Dollar. Without you realizing it, this may have worked against you due to the decline of the value of the US Dollar against other major currencies.
The Forex market provides the investor with a valuable tool in managing the effects of the foreign exchange risk by taking advantage of fluctuations in exchange rates. In a time when the speed of business increases on a daily basis, you need the ability to react swiftly. You can readily access this global market 24 hours a day and be able to hedge your outstanding US Dollar-based holdings.