Forex Platforms

What is Forex?

“Forex” is short for the “foreign exchange market,” where the buying and selling of currency takes place. One of the largest, most liquid markets in the world, the forex market is where large banks, central banks, and governments go to trade. In April 2007, the daily volume of trading exceeded US $3.2 trillion. Trading volume continues to increase.

The Basics of How Forex Works

There are two primary reasons that foreign currencies are traded. The first reason is that companies who do business abroad have a need to change the money they make into their home currency. For example, a Japanese company that does business in the United States needs to convert the dollars it earns in the US into Japanese yen so that it can pay its workers and so forth in Japan. This type of currency exchange accounts for only 5% of the daily trading.

The remaining 95% of currency trading in forex occurs when speculators buy up currency with the intention of selling it back at a higher price. For example, the British pound may drop, and an investor who believes the price will go back up later on may choose to buy the pound at the lower rate.

Who’s Who in Forex

While the biggest forex market is in London, New York, Singapore, Sydney, and Tokyo are also major players. As soon as one forex market stops trading for the day, another one somewhere in the world is just beginning.

The participants in the forex market span a broad range: banks, hedge funds, and commercial companies all play on the forex market in an attempt to increase profits for their companies or customers. Smaller players include retail exchange brokers, who buy currency with the intention of selling it again to foreign travelers or tourists.

Central banks play a different role in the market. They act on behalf of a given nation, and their main interest is stabilizing their nation’s currency by buying their own currency up when the price goes too low (thus driving the price of the currency up), and selling their own currency when prices get too high (thus protecting against boom-bust cycles).

Trading on the forex market has increased nearly 600% since 1988, and its continued growth is another sign of the interconnectedness of the world’s markets and the steady forward march of globalization. Watching the forex market can teach much about the collective future of the world’s financial systems.

Tags: Forex

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