Business, Legal & Accounting Glossary
The ”’foreign exchange market”’ is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies.
Forex or Foreign Exchange refers to any trading on the currency market. The forex market is a highly liquid market that large corporations and financial firms use as a way to manage financial risk. The forex market can be regulated by the CFTC, but generally does not. Most traders rely on fundamental and technical analysis to arbitrage spot transactions and forward contracts and also work with sovereign debt, interest rate swaps, and corporate bonds.
Forex stands for foreign (FOR) exchange (EX).
The FOREX or Foreign Exchange market is the largest financial market in the world, with a volume of more than $1.5 trillion daily, dealing in currencies. Unlike other financial markets, the Forex market has no physical location, no central exchange. It operates through an electronic network of banks, corporations, and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another across the major financial centers.
The Forex market trades currencies from all over the world.
The Forex market is a 24 hour/day market starting on Sundays at 5 pm EST and closing on Fridays at 5 pm EST.
There are five major Forex trading areas which in order of opening hours are Sydney (Australia), Tokyo (Japan), Frankfurt (Germany), London (UK), and New York (USA). Although the Forex market is open 24 hours/day, in order to get the highest liquidity, Forex market participants prefer trading when several Forex trading areas are open simultaneously. Market participants in the Forex market include banks, brokers, central banks, hedge funds, investment firms, investors, and multinational corporations.
Traditionally, investors’ only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971.
Market participants in the Forex market trade over the counter. Most Forex market participants speculate on the exchange rate to extract some profits. Other Forex market participants, such as corporations, for example, may seek to exchange a currency earned in another country for their home currency. Central banks are also known to trade large volumes in the Forex market to impact a particular currency exchange rate. The Forex market is considered the world’s largest market given the level of cash traded daily. The Forex market is also referred to as the FX market.
Forex works on the same market mechanism as does other markets around the globe. But here the primary products are currencies of different countries. Other assets along with the money are also placed in this market but you make your profits only by currency trading. As the exchange rate fluctuates, you make either profit or you lose money.
A concept of global village applies here, Forex markets never close. Due to differences in time zones, when one market closes, other markets in other parts of the world open. The effect of one market is transmitted to all other markets of the world. But usually margin all around the world is nearly equal and there is not much of the difference.
Whenever a country trades goods or services with another country, the Forex market is present. The reason is that since the currencies of the two countries are different, the exchange of money between these countries is done through Forex.
Often a bank is the source of Forex trading and is involved in a huge amount of currency exchange. Forex is the largest market around the world as trillions of dollars are traded every day in this market. If you have been working with the stock market, you should have the idea of Forex trading as well.
As in stock markets, trading of stocks and bonds occurs frequently, and the company waits unless huge profit margins are available. In the Forex market, you are purchasing items or products, or goods, and you are paying money for them. While doing this you earn or you lose the difference in the exchange rates of the currencies you selected.
For the purpose of better understanding, you can use online software “game” that can be helpful for your training. You first have to create your fake account online and then log on to the site. The ‘game’ will allow you to make purchases and trades, so you can then see firsthand what a gain or loss will be like. This involves different currencies.
Using this account you will be aware of how to make decisions keeping in mind the market conditions. You will have to take a broker’s information at value. Since this is software you can play it from there.
If you are a single investor, you must not trade individually. You must involve a broker or trade through a financial institution. Individual investors are also called spectators. Even if you have a small sum of money as compared to large investors like government or banks etc, brokers or investment advisors will provide you more effective information about trading in Forex.
In the US there are different laws on Forex trading. If you wish to engage an online broker, it is ok. But be careful. Read information about the company, which might be available through the internet. Check the legal status of the company and also ensure its location and its history.
FX market
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This glossary post was last updated: 13th November, 2021 | 0 Views.