What is Forex Market?
The Forex market is a financial instrument where one country’s currency is converted to another. This market is a tool which allows multi national companies to exchange currencies to facilitate international trade and financial transactions. In a global economy, many of these companies need to exchange their home currency for a foreign currency to pay for their purchases and direct investments. Currency for payment of imports, direct investments, account payables are made possible by this conversion process. The opposite is also true when these same companies convert foreign currency back to their home currency due to export and receivables abroad. Thus, one can see why this market is a vital tool in the global economy. The system for establishing exchange rates has gone through major milestones over time.
Over 1.9 trillion dollars is traded daily in the Forex market, making it the largest financial market in the world. It trades around the clock, allowing all interested parties to react to any market conditions from political turmoil to financial instabilities of any country.
Conversely, this huge liquid market provides great trading opportunities for traders and speculators alike. Only 5% of daily activity is from multi nationals and governments who buy and sell currency related products. The remaining 95% is purely speculative trading.
The most traded currencies include; US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. These currencies which are called “the Majors” comprise of about 85% of all daily transactions. There is no specific centralized location or exchange for trading FX, (such as the NYSE, CME and the CBOT to name a few). It is all conducted Over The Counter (OTC) or “interbank”.
