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Forex market (short for “foreign exchange”) is the largest and the most liquid financial market where the global currencies are traded. Forex traders purchase currencies with the intent to make money off of the difference between the buying and the selling prices.
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Introduction to Forex Trading
The foreign exchange market, also known as FX or Forex trading, is one the most fast paced, dynamic markets in the world.
Traditionally, huge global financial institutions, central banks, hedge funds, and the super-rich dominated the Forex trading market. All of this changed with the arrival of the internet. Now there are no barriers preventing anyone from Forex trading. It is completely accessible to most investors, and you can buy and sell international currencies at the click of a mouse from your own home.
Currency is similar to language, in that it varies from country to country. If you want to do international business or buy goods from abroad, you must pay with the local currency. For instance, you wouldn’t expect to use Swiss Francs to pay for your meal in Marrakech, which is exactly where Forex trading comes in.
Global currencies are traded on the foreign exchange market. Comparing this market to the stock market is one way to grasp the sheer scale of it; the average traded value of the global stock market is around $2,000 billion per day, while Forex trading surpasses $4.9 trillion daily.
Unlike some other markets, this is no central market for Forex trading. Currency trading is all done over the counter electronically on global computer networks between individual traders. There are five major Forex trading centers: Frankfurt, Hong Kong, London, New York and Tokyo.
The Forex market is open 24 hours a day, five and a half days a week, and operates across nearly every time zone, which makes for an active market in a continual state of flux, with prices changing all the time.
A stock market is where stocks are traded: where sellers and buyers come to agree on a price. Historically, stock exchanges existed in a physical location, and all transactions took place on the trading floor. One of the world’s most famous stock markets is the London Stock Exchange (LSE).
Yet as technology progresses, so does the stock market. Now we are seeing the rise of virtual stock exchanges that are made up of large computer networks will all trades performed electronically.
A company’s shares can be traded on the stock market only following its IPO, making this a secondary market. The large businesses listed on global stock exchanges do not trade stocks on a frequent basis. Stocks can only be purchased from an existing shareholder, not directly from the company. This rule also applies in reverse, so when selling your shares, they go to another investor, not back to the corporation.
The reason traders choose to invest in stock is because the perceived value of a company can vary greatly over time. Money can be made or lost; it depends on whether the trader’s perceptions of the stock value are in line with the market.
Trying to predict the price movements of stocks in the short term is nearly impossible. Generally, stocks do tend to appreciate in value in the long term, so many investors choose to have a diverse portfolio of stocks that they intend to keep for a long time. Bigger companies pay dividends to their shareholders, which is a portion of the company’s profits. The value of the share itself will not impact the dividend.
In order to trade stocks, there must be a seller and a buyer; as not all traders have the same agenda, stocks are bought and sold at different times and for different reasons. Someone may sell their stock for profit, others sell it in order to cut losses, and some because they believe the value of the stock is about to change either way.
Foreign exchange is a relatively stable market, with most currency pairs moving less than 1% daily, meaning the value changes very little.
However, because of this low level of volatility, many Forex traders utilize the huge leverage to greatly increase the value of these price movements. Leverage in the Forex market can be as high as 250:1, but this higher level of reward also carries a higher level of risk.
The deep liquidity of the Forex market, coupled with the fact trading continues 24 hours a day, means that Forex brokers can make that high leverage industry standard, in turn making any price movements far more meaningful for Forex traders. Time is another factor, and positions can be opened and closed within minutes, or retained for several months. The sheer size of the Forex market makes it impossible for the bigger players to start manipulating prices, as well.