Forex trading is the world’s largest financial market, with over $2 trillion USD traded daily. Currency values fluctuate due to supply and demand and speculation. Forex trading has low costs and high volatility, and is now accessible to small investors through the internet.
Forex trading is the largest financial market on the planet. It is estimated that more than $2 trillion US dollars (USD) are traded every day. Compare this to the New York Stock Exchange’s daily transactions of approximately $50 billion dollars, and one can see that the magnitude of the forex trading market exceeds all other equity markets in the world combined.
The practice of currency trading is also commonly known as foreign exchange, Forex, or FX for short. Every currency has a value relative to other currencies around the world. Forex trading uses the buying and selling of large amounts of currency to supplement changes in the value of the currency in order to make a profit.
Why does the value of currency fluctuate?
There are two main reasons why the relative value of a currency fluctuates. The first is due to a “real” market, which is based on supply and demand. For example, because outside investors or visitors want to buy things within another country, they are forced to convert their home currency into the currency of the country in which they are buying. Similarly, as money leaves the country, people must sell their currency for the foreign currency they will need to spend or invest abroad. The exchange of currencies drives supply and demand, causing the value of the currency to rise or fall.
The second force for currency fluctuation is speculation. When investors think that a certain currency will perform strongly or weakly, they will buy or sell accordingly. This speculation can have drastic consequences on a national currency and, consequently, on the economy of a country. During the East Asian crisis in 1997, for example, when Asian nations began to face economic downturns, speculators used currency trading for huge profits and, many analysts believe, helped exacerbate the problem.
Forex Benefits
Trading forex has many very real benefits over different types of stock trading, such as the stock market. Spreads for Forex are extremely low, which means there is not much of a gap between the currency’s ask price and the bid price; this generally results in very low costs for a forex trader. The volatility, or measure of how much the price varies over time, of the forex market is extremely high, which means that a trader can generate a huge return on any given trade. The volatility to spread ratio is approximately 500:1 for the Forex market, compared to 100:1 for even the most ideal stocks. In other words, forex trading usually involves a market with fluctuating prices and traders agreeing on the price.
Until recently, the forex trading market was closed to small investors. Banking conglomerates made up of multiple businesses and large multinational companies were the main drivers of this market. However, in recent years, new technologies have opened the doors to investors of all persuasions: it is now possible for people to participate in the market through the Internet. There are various websites that allow a person to create an account and trade currencies from their own computer; Some services also have brokers to give advice, answer questions, and help manage the trade. It’s hard to miss the enormous benefit of this “new” market for the individual investor: higher returns with lower risk, given the same amount of market knowledge, have very little downside.
Smart Asset.
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