Foreign Exchange Markets

By: Mel Joelle

The foreign exchange market (also known as forex) is a global financial market for trading currencies. Trading currencies is currently the world’s largest market. It consists of almost a trillion in daily volume. During the weekdays, around the clock, worldwide financial centers act as anchors of trading between a variety of different types of buyers and sellers. The relative value of different currencies is determined by the foreign exchange market.

The essential purpose of the global exchange market is the assistance of international trade and investment. This is achieved by allowing businesses to convert one currency to another currency. What this means is that a Japanese business can import US goods and pay using the US dollar even if the business’s native income is Yen. This also promotes the carry trade. Investors borrow low-yielding currencies and invest in high yielding currencies. In some countries this may lead to a loss of competiveness.

Typically in foreign exchange, a quantity of one currency is purchased, by a party, by paying a quantity of another currency.

There are several reasons why the foreign exchange market is unique. It starts with the high trading volume that leads to high market liquidity. This liquidity is an asset’s ability to be sold without causing significant movement in the price and with minimum loss of value. Another unique aspect of the forex market is that there is continuous, 24 hour, operation with the exception of weekends.

With the foreign exchange market, there are a variety of factors that affect the exchange rate. There is also the low margin of relative profit compared with other markets on fixed income and the use of leverage to enhance profit margins with respect to account size.

As of very recently, the average daily turnover in global exchange markets estimate at $3.98 trillion. This is a growth of nearly 20% over the $3.21 trillion daily volume in early 2007.

Traders in the foreign exchange market include large banks, institutional investors, central banks, currency speculators, governments, corporations, retail investors and other financial institutions. There is continuous growth in the average daily turnover in the global foreign exchange market.

Much unlike the stock market, the foreign exchange market is divided into access levels. The largest commercial banks and securities dealers, the inter-bank market, are at the top. There are spreads, which are the difference between the bid and ask prices, within the inter-bank market. The spreads are sharp and unknown to players outside of the inner circle. As you go down the levels of access, the difference between the bid and ask prices widens. This is a result of volume. The levels of access that make up the foreign exchange market are determined by the size of the amount of money with which they are trading.

These are a few fundamentals on the foreign exchange market. For more information, visit today!

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