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Introduction To FOREX
By Ron King
The Foreign Exchange Market, better known as FOREX, is a
worldwide market for buying and selling currencies. It handles a
huge volume of transactions 24 hours a day, 5 days a week. Daily
exchanges are worth approximately $1.5 trillion (US dollars). In
comparison, the United States Treasury Bond market averages
$300 billion a day, and American stock markets exchange about
$100 billion a day.
The Foreign Exchange Market was established in 1971 when fixed
currency exchanges were abolished. Currencies became valued at
'floating' rates determined by supply and demand. The FOREX grew
steadily throughout the 1970's, but with the technological
advances of the 80's FOREX expanded from trading levels of $70
billion a day to the current level of $1.5 trillion.
Who Trades in FOREX?
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. There is no centralized location of
FOREX; major trading centers are located in New York, Tokyo,
London, Hong Kong, Singapore, Paris, and Frankfurt. All trading is
done by telephone or Internet. Businesses use the market to buy
and sell their products in other countries, but 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 the 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' 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.
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 ensures 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.
How does it work?
Currencies are always traded in pairs: the US dollar against the
Japanese yen, or the English pound against the euro. Every
transaction involves selling one currency and buying another, so if
an investor believes the euro will gain against the dollar, he will
sell dollars and buy euros.
The potential for profit exists because there is always movement
between currencies. Even small changes can result in substantial
profits because of the large amount of money involved in each
transaction. At the same time, it can be a relatively safe market for
the individual investor. There are safeguards built in to protect
both the broker and the investor, and a number of software tools
exist to minimize loss.
About the Author
Ron King is a full-time researcher, writer, and web developer. Visit http://www.forex4u-now.com to learn more about this fascinating investment medium.
Copyright 2005 Ron King. This article may be reprinted if the resource box is left intact.
Article Source: http://www.simplysearch4it.com/article/8417.html
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