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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. 

BREAKING DOWN 'Foreign Exchange Market'

The foreign exchange market – also called forex, FX, or currency market – trades currencies. It is considered to be the largest financial market in the world. 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, another market in a different part of the world opens for business. 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. 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 percent, with a 100:1 leverage.

The Biggest in the World of Finance

The foreign exchange market is unique for several reasons, mainly because of its size. Trading volume in the forex market is generally very large because of the number of people who participate, the ease of trading as well as accessibility to the market. As an example, trading in foreign exchange markets averaged $5.1 trillion per day in April 2016, according to the Bank for International Settlements, which is owned by 60 central banks, and is used to work in monetary and financial responsibility. 

Benefits of Using the Forex Market

There are some key factors that differentiate the forex market from others like the stock market. There are fewer rules, which means investors aren't held to strict standards or regulations as those in other markets. There are no clearing houses and no central bodies that oversee the forex market. Most investors won't have to pay the traditional fees or commissions that you would on another market. Because the market is open 24 hours a day, you can trade at any time of day, which means there's nocut off time to be able to participate in the market. Finally, if you're worried about risk and reward, you can get in and out whenever you want and you can buy as much currency as you can afford. 

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