What is Foreign Exchange (Forex)?
“Foreign exchange (FOREX) is the arena where a nation’s currency is exchanged for that of another. The global foreign exchange market is the largest financial market in the world in terms of daily volume, with the equivalent of over $1.9 trillion changing hands daily; more than three times the aggregate amount of the US Equity and Treasury markets combined, and about 6-8 times higher than the volume in the stock exchange worldwide.
The commodities traded on Forex are national currencies. Unlike other financial markets, the Forex market has no physical location and no central exchange. It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers. In essence, it is a truly global market, which operates around-the-clock and around-the-globe. The global nature of the Forex market, utilizing modern information technologies and financial services, enables private investors to participate in the market from their homes or offices now via telephone or computer with an internet connection.
Traditionally, retail investors’ only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets.
The Forex market is quite different than a market such as the stock market. As a result of its global dimension, the Forex market is open 24 hours a day, which enables investors to correct their positions at any point in time. Given the large number of players, the Forex market has narrow spreads and virtually no price gaps. The lack of price gaps typically enables investors to count on non-slippage order execution. However, in a very volatile market the possibility for slippage exists.
The large volume of participants also reduces opportunity for insider information. To put it simply, there has never been a case of complete non-recoverable currency collapse in a developed country. The volatility of leading currencies rarely exceeds 1% per day, in contrast to the volatility of stocks, which may fluctuate by up to 10% over one trading session. The Forex market generally provides more opportunities for leveraged trading (although it should be noted that a higher leverage size is associated with higher risks).
According to New York time, trading begins at 2.15pm on Sunday in Sydney and Singapore and progresses through to Tokyo at 7pm, London at 2am and reaches New York at 8am. This leaves investors free to respond to global political, economic and social events when they take place, day or night.” – RB Capital Management.