Basic Forex Information
What is Forex ?
If you have ever been to another country, it is likely that you have had to change your money for the currency of the other country. When you sell your currency and buy the currency of the other country, it is basically taking part in the foreign exchange market.
For example, you sell your dollars and you purchase pounds. Say you had bought 1000 dollars of pounds and got 620 pounds, and for some reason you didn’t spend any of it. When returning home, you swap your pounds back to dollars and you end up with 1020 dollars in your hands. The dollar versus sterling exchange rate had changed while you were away and you end up making 20 dollars. This is how people make money in the forex market, by buying and selling currencies.
The forex market, sometimes known as foreign exchange, fx and currency exchange, is huge. Every single trading day, over 4 trillion (4,000,000,000,000) dollars is exchanged. If you compare that against what is traded at the New York Stock Exchange (NYSE) daily, 33 billion (33,000,000,000) dollars, it puts it into perspective.
Forex is about 120 times as big!!.
The stock and futures markets are run through a centralized exchange that is controlled by just one dedicated body that regulates the price of the stocks. The price can be influenced by the specialist body to suit themselves.
The currency exchange market however, does not have one single physical location and is known as a decentralized market. Because it has no central location, there is a variation in quotes from one dealer to another because there is no single price. There is so much competitiveness amongst dealers because the fx market is so massive, that you can seek out the top deals the majority of the time.
Who trades forex ?
The majority of trading in the foreign exchange market is carried out by big corporations and businesses such as banks and financial institutions. They account for almost two thirds of the trading.
Most trading is carried out by banks in the interbank market. They trade instantaneously either directly between one another or through two major corporations, Reuters and EBS. These corporations are in a continuous struggle to grab the majority of the market from the banks. They both tender most currency pairs and with both companies, certain currency pairs are more liquid than others, so they both have advantages.
Electronic Communication Networks (ECNs), businesses and hedge funds are also big players. The rates that these organizations are subject to are marginally higher than those of the banks because they have to carry out their trades with commercial banks rather than the interbank market.
Lastly, retail traders, (individuals), make up the rest of the trading groups. Since the arrival of high speed internet and retail brokerages, all hurdles have been taken away and now everybody can play a part and attempt to grab their part of the money mountain.