Foreign Exchange Market

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What is the 'Foreign Exchange Market'

The foreign exchange market is the market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The forex market is considered the largest financial market in the world.

BREAKING DOWN 'Foreign Exchange Market'

The foreign exchange market – also called forex, FX, or currency market – trades currencies. Aside from providing a floor for the buying, selling, exchanging and speculation of currencies, the forex market also enables currency conversion for international trade and investments.

The forex market has unique characteristics and properties that make it an attractive market for investors who want to optimize their profits.

Highly Liquid

The forex market has enticed retail currency traders from all over the world because of its benefits. One of the benefits of trading currencies is its massive trading volume, which covers the largest asset class globally. This means that currency traders are provided with high liquidity.

Open 24 Hours a Day, 5 Days a Week

In the forex market, as one major forex market closes, one in another part of the world opens. Unlike stocks, the forex market operates 24 hours daily except on weekends. Traders find this as one of the most compelling reasons to choose forex, since it provides convenient opportunities for those who are in school or work during regular work days and hours.

Leverage

The leverage given in the forex market is one of the highest forms of leverage that traders and investors can use. Simply put, leverage is a loan given to an investor by his broker. With this loan, investors are able to enhance profits and gains by increasing traders’ and investors’ control over the currencies they are trading.

For example, investors who have a $1,000 forex market account can trade $100,000 worth of currency with a margin of 1%, with a 100:1 leverage.

The Biggest in the World of Finance

In 2013, the Triennial Central Bank Survey of Foreign exchange and OTC Derivatives Market Activity provided statistics on the amount of currencies traded daily, and has stated an average of $4 trillion traded daily. The break-down of this amount shows that $1.490 trillion were traded in spot transactions, $475 billion in outright forwards, $1.765 trillion in foreign exchange swaps, $43 billion in currency swaps, and $207 billion in options and other forex products.