Intro to FOREX
The Foreign Exchange Market – more commonly known as
FOREX - is a the global market for trading currencies. It handles a huge volume
of transactions 24 hours a day, 5 days a week.
Daily exchanges average approximately $2 trillion (US
dollars). In comparison, the United States stock markets, like the New York
Stock Exchange and the NASDAQ, handle only about $100 billion a day. (Only about
5% of the size of the daily FOREX market)
The Foreign Exchange Market was established in the
early 1970s with the abolishment of fixed currency exchanges under President
Nixon.
Currencies became valued at 'floating' rates
determined by supply and demand.
The FOREX grew steadily throughout the 1970's, but it
was the technological advances of the 80's that allowed FOREX to grow from
trading levels of $70 billion a day to the current
level of around $2 trillion.
The FOREX is made up of about 5,000 trading
institutions such as international banks, central government banks (such as the
US Federal Reserve), and commercial companies and brokers for all types of
foreign currency exchange.
There is no centralized location for the FOREX –
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 allow them to buy and sell products in
foreign countries.
However, most of the activity on the FOREX is from
currency traders who use it to generate profits from small movements in the
market.
Even though there are many huge players in FOREX, it
is accessible to the small investor thanks to recent changes in regulations.
Previously, there was a minimum transaction size and traders were required to
meet strict financial requirements.
With the advent of Internet trading, regulations have
been changed to allow large interbank units to be broken down into smaller lots.
Each lot is worth about $100,000 and is accessible to the individual investor
through 'leverage' or 'margin' – loans extended for trading. Typically, lots can
be controlled with a leverage of 100:1 meaning that US$1,000 will allow you to
control a $100,000 currency exchange.
There are many advantages to
trading in FOREX.
● Liquidity - Because of the size of the Foreign
Exchange Market, investments are extremely liquid. International banks are
continuously providing bid and ask offers and the high number of transactions
each day means there is always a buyer or a seller for any currency.
● Accessibility – The market is open 24 hours a day,
5 days a week. The market opens Monday morning Australian time and closes Friday
afternoon New York time. Trades can be done on the Internet from your home or
office.
● Open Market – Currency fluctuations are usually
caused by changes in national economies. News about these changes is accessible
to everyone at the same time – there can be no 'insider trading' in FOREX.
● No commission – Brokers earn money by setting a
'spread' – the difference between what a currency can be bought at and what it
can be sold at.
