Forex is the largest financial market in the world, where currencies are traded by big banks, corporations, governments, and small investors. The US dollar dominates the market, and most currencies are traded by large banks. The market is open 24/6, and its volatility, liquidity, and size make it attractive to investors, but it’s also risky. Investors should educate themselves on the risks involved, carefully consider their risk tolerance, and be in a financial position to withstand losses.
The foreign exchange market, commonly referred to as Forex, is the financial market in which currencies are traded. Forex traders trade currencies they expect to hold or decrease in value for currencies they expect to rise. For example, if the investor believes that the US dollar will remain static as the euro increases in value, they will exchange their dollars for euros. If the euro rises, the investor will change the euro into dollars, getting more American money than they put into trade.
The Forex market is the largest financial market in the world, three times the size of every other stock and futures market combined. Dwarf giants like the New York Stock Exchange; nearly four trillion dollars of currency is traded each day in the Forex market, compared to the fifty-five billion dollars traded on Wall Street. Big banks, corporations, and national governments trade currencies alongside small investors and traders hoping to cut profits from market moves.
The Forex market is not centrally located. Small transactions are performed by intermediaries and all currencies are exchanged by banks. While currency trading is done worldwide, nearly thirty-five percent of forex trading takes place in London, with New York and Tokyo trailing at seventeen and six percent, respectively. Due to its global nature, Forex is open twenty-four hours a day, six days a week.
There are many different currencies traded on the Forex market, but the five most common are the US dollar, the euro, the Japanese yen, the pound sterling and the Swiss franc. The US dollar dominates the market, making up over eighty percent of the funds traded. Most currencies are traded by large banks, with Germany’s Deutsche Bank, Switzerland’s UBS AG, Britain’s Barclays Capital and US’s Citi processing more than fifty percent of transactions.
Individuals considering investing in the Forex market should educate themselves on the risks involved. While the forex market’s volatility, liquidity and sheer size make it an attractive option for investors, the opportunity for loss is as great as the opportunity for gain. The Forex market is particularly sensitive to world events, fluctuating widely by variables such as geopolitics, natural disasters and the economic outlook of individual nations.
Additionally, individual investors usually trade on margin, essentially buying currencies on credit, increasing their susceptibility to profit and loss. Forays into the Forex market are best made by investors who have studied the market, carefully considered their risk tolerance, and are in a financial position to withstand losses when they come.
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