THE FOREX MARKET
The International Foreign Exchange Market, also referred to as Forex or FX, is the simultaneous exchange of one country's currency for that of another. An investor purchases or sells one currency for another in anticipation of profiting when the value of the currencies changes in favor of the investor’s position, whether from market news or events that take place in the world.
This currency exchange market has more daily volume than any other in the World. International institutions generally require a specific currency to complete a transaction, or to hedge against negative implications resulting from effects of currency swings and rate changes. In international trade, it is standard operation for the currency of one country to be exchanged for that of another for settlement of a transaction. Numerous financial institutions across the globe transact business around the clock; the Forex market is open 24-hours a day, 6 days per week.
MARKET SIZE AND COMPOSITION
Forex volume approaches $2 trillion a day and has doubled in the last decade from $1.0 trillion. In 2001 volume neared approximately $2.2 trillion, and then adjusted to $1.8 trillion in 2003. The spike was likely due to a single Euro currency replacing 12 European currencies. The vast majority of activity in Forex is speculation such as spot trades (95%). The remaining 5% includes companies exchanging foreign currencies for their respective domestic or base currency to repatriate profits and engage in general transactions.
THE TRADED CURRENCIES
The most common currency pairs are EUR/USD (30%), USD/JPY (20%), GBP/USD (10%), and USD/CHF (5%), and account for two-thirds of all Forex spot trades.
The Dollar, Euro, Yen, and Pound are the most heavily traded currencies. These major currencies produce a huge bulk of the trading transactions in a single day. These currencies dominate market share. Over 75% of all currency pair trades include a major currency in the currency pair; over 98% of all trades involve at least one major currency.
FOREX TRADING
Forex Trading in recent years has been widely accepted by many corporations, institutions, and individuals as an effective and efficient investment tool. It is also considered a vital hedging tool against currency exposure with flexibility and liquidity. Trades are executed in standard contract sizes and most currencies can be traded in any matched pair. Each contract can be traded by depositing a fraction of the contract value, referred to as a Margin Deposit. This enables investors to reap high returns with a minimum capital commitment, but like all speculative investments, especially those that employ high amounts of leverage, there is a potential risk for elevated losses as well.
MAJOR PLAYERS
The International Foreign Exchange Market is a non-physical market and non-centralized exchange market. In this market major participants include Central Banks, prime multinational banks, large corporations, brokerage houses, and individual investors. Forex services to investors generally include but are not limited to financial analysis, information acquisition, and market activity updates. Transactions are conducted through online trading systems, via the telephone, and networks comprising the two.
The considerable volume of transactions generated by the primary market contributes to the high liquidity in the Forex market. The primary market, also referred to as the "interbank market,” includes banks, large financial institutions, insurance companies and other large corporations. The parties deal with each other in huge quantities to manage their respective currency risks. Retail clients, also referred to as secondary over-the-counter market, who participate in Forex transactions benefit from the liquidity of large institutions.
BENEFITS OF THE FOREX MARKET
24 Hour availability: Investors can capitalize on opportunistic market conditions any time… independent of an opening bell.
Leveraged Liquidity: Unlike futures or the stock market, there is never a lack of buyers or sellers. Investors open or close positions at will.
Attractive Pricing: Forex quotes are based on spot prices and independent of transaction size. Prices are quoted on a net basis.
Rapid Execution: Orders are both executed and confirmed online, manually via a recorded phone call, or in tandem. The rate at which the order is executed is immediately reported. Confirmed orders receive a single price execution.
Hedging Tool: Investors whose investments include international trade may try to substantially minimize their currency exposure risks by trading in Forex.
Margin Ability: Investors characteristically leverage on contracts up to one hundred times the initial margin deposit. That is, with approximately 1% of the absolute value of contracts, investors participate in the world’s largest marketplace. As long as you are able to maintain your margin requirements on the full contract value, you can remain in the market. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
Independent of Stock Market: The relationship between the stock market and the foreign currency market is indirect and minimal at best. Unlike many markets, there is almost always a good trading opportunity. Bull and bear markets for a currency are defined in terms of the outlook for its relative value against other currencies. A positive outlook for a currency would be one in which an investor profits by buying that currency against other currencies. Alternatively, a pessimistic outlook would be one in which investors profit by selling the currency against other currencies.
No One can Corner the Foreign Currency Market: The sheer size of volume and number of participants virtually eliminates the prospect of a single entity from controlling the market price for an extended period of time.