The Foreign Exchange or currency markets (more commonly referred to as the Forex or FX market), is the single largest financial market in the world, with over $3.5 trillion dollars changing hands every day.
That’s larger than the entire US equity and Treasury markets combined!
Unlike other financial markets, such as the stock or commodity markets that operate at a centralized location, (i.e. NYSE stock exchange), the global Forex market has no central location. It is a worldwide electronic global network of financial institutions, major banks and individual traders, all involved in the buying and the selling of currencies.
A major and unique feature of the Forex market is that it operates non-stop, 24 hours a day, corresponding to the opening and the closing of major world financial centers in countries around the globe. The trading day starts in Sydney, AU and then Tokyo, followed by the London and New York markets. At any time, in any of these locations, there are global buyers and sellers making trades, thus making the Forex market the most absolute liquid market in the world.
Not too long ago, access to the Foreign Exchange market was made available only to the major banks and other large financial institutions. With advances in technology, trading the Forex market is now available to anyone, from small to large banks, individual traders and speculators, to large money hedge managers trading retail accounts. The opportunity to get involved in this global market hasn’t been better than right now. You can now open an account for less than $500 and become an active player, rubbing shoulders with the big boys in the largest market on the planet.
Keep in mind that the Forex Market is different from trading currencies on the futures market, and it’s a lot easier than trading stocks or commodities.
Whether you’re aware of it or not, you already play a small role in the Forex market. The simple fact that you have cash in your pocket makes you an investor in that currency, particularly if its the US Dollar. By holding any amount of US Dollars, you have elected not to hold the currency of any other nation. Your portfolio of: bonds, stocks, or any other financial instrument, along with the US funds deposited in your bank account, represents investments that rely heavily on the value of ¨the mighty US Dollar. However, due to the constantly changing value of the US greenback, combined with fluctuating exchange and interest rates, your investments are constantly changing in value, thus affecting your overall financial status. With this in mind, it’s no surprise that a lot of savvy investors take advantage of the fluctuations in Exchange Rates, using the volatility of the Foreign Currency Exchange markets as a way to increase their overall capital.
For Example: Say you have $1000 USD and decide to buy Euros. The exchange rate is 1.50 Euros to every 1 US dollar. You would receive 1500 Euros. If the value of the Euro against the US dollar increases, then you would be inclined to sell (or exchange) your Euros back into US dollars and have more dollars than you originally started with.
The EUR/USD currently trading at 1.5000 means
The first currency EUR (the EURO) is the base currency and the second the (/USD) is the counter or quote currency.
If the currency pair goes up to 1.75 the following month, and you sold the Euro back into US dollars, it would now be worth $1166.65 (1750/1.50). You have made a small profit based on natural currency fluctuation.
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