Forex, or the foreign exchange market, is the investors market in which foreign currency transactions are dealt. To begin, forex is an over-the-counter market; this means it is not commonly traded on an exchange because it is not enough to meet the requirements to be listed as well as the fact that transactions are conducted directly between two counterparts. They are generally considered risky because it is dealing with stocks that are not generally big or stable enough to be traded on a major exchange.
The foreign exchange market is the largest financial market in the world. It is also one of the most popular for speculation because of its large size, liquidity and tendency towards sound trends.
Contrasting to other markets, the forex is open twenty-four hours a day. Trading begins in Sydney and persists throughout the day as centers around the world open for business. Some of the things that make this market so lucrative are regular liquidity (that is easily convertible to cash), trading with no commission, hassle-free risk management and the previous mentioned twenty-four hour trading.
Foreign exchange market quotes are made up of two numbers, the first being the base currency and the second being the counter currency. This shows how much of the counter currency can be bought with one increment of the base currency. For instance, if the exchange rate for the GBP/USD (Great Britain Pound/United States Dollar) is 1.8435, than one Great Britain Pound can be exchanged for 1.8435 United States Dollars.
Another aspect of this included the pip. This term related to the fifth and last digit in the rate (the 5 from the example above). This is used to measure changes in the exchange rate. So if the rate from the above example rose to 1.8440 than the GBP/USD rose five pips.
Another common term heard when dealing with the foreign exchange market is the term leverage. Leverage is what lets traders borrow money and use said money to invest in the forex. This lets clients with a large amount of capital make big investments and capitalizes on their profits. In other markets clients would have to pay the whole amount for each share of the stock in which they were investing their money.
The majority of markets let positions be leveraged up to 100:1; meaning that is someone wished to buy an amount that cost 100,000 United State Dollars with this ratio of leverage they would only have to put up 1,000 United State Dollars.
The foreign exchange market can be extremely confusing for those not in the investing business or who do not follow it. Yet for those who do or can get the grasp of it, it can be profitable as well and have many features that other markets do not offer a trader. Yet always be careful with investing, and if you do not understand something either do not invest or ask the help of a professional. There can be a lot at stake and of course no one wants to end up losing a large amount of money, or any amount of money for that matter.
By Lauren Culliton