Investing In The Foreign Exchange Market: What Is Forex?

Guide To Investing In The Foreign Exchange Market

Part 1

What is Foreign Exchange?

The Foreign Exchange, or Forex , is what we call when a trade is made between two different currencies like US dollars to Euros, Japanese Yen to US dollars, US dollars to Pound Sterling, etc.

A great example of this is when you go from another country to another, let’s say you go to Japan from the United States, you need to exchange your US dollars to Japanese yen for you to buy things on that country. If 1 US dollar is equivalent to 110 Japanese yen and you have about 1,000 US dollars to spend in Japan then you’re going to carry about 110,000 Japanese yen in your wallet. That’s a lot of money, right?

If you decided to go back to the US and you still haven’t spend all the Japanese yen you had, then you have the option to exchange it back to US dollars. Let’s say you still have 10,000 Japanese yen and the exchange rate changed from $1 equals=110 Japanese yen to $1=100 Japanese yen. Your 10,000 Japanese Yen will then be equivalent to $100 US dollars.

Next, is the foreign exchange market and things you should know about it before you invest on Forex.

Things You Should Know About Foreign Exchange And The Forex Market
  • Forex Market is the LARGEST in the world

An interesting fact about foreign exchange is that the Foreign Exchange Market is the biggest financial market in the world. The simple reason for that is because the Foreign Exchange Market trades more or less $5 trillion dollars worth of currencies every day. Larger than what any stock market in the world can trade in a single day.

READ ALSO:  How to Compute Your Mutual Funds Earnings

Yes, you read that right a whopping FIVE BILLION DOLLARS are traded each day in the Forex Market. And if you’re wondering why I always use US dollars as an example, it’s because the United States (US) Dollar is the main and most used currency in the Foreign Exchange Market.

  • Forex Market is somewhat like the stock market

The Foreign Exchange Market has some similarities with the stock market because they are both volatile. Exchange rates can change faster than the price of any listed stocks in any stock market. For that reason, it is said to be riskier to participate in Forex trading than investing in the stock market. And as an aspiring investor in Forex, you should take note of that.

  • Forex Market is open 24 hours

Unlike the stock market that is only open on a very limited time, the Forex Market is open 24 hours a day, 5 days a week. With that, a person participating in Forex trading must have the time and dedication to monitor his or her investments as often as possible because being an unaware trader may cost you a lot of money in the end.

  • Forex Market isn’t located on the map

Another difference it has with a stock market is that the Foreign Exchange Market doesn’t have a physical location. It’s not located in the United States, China or even in London. The trading of currencies are done through the help of electronic communication networks (ECNs). Basically, the trading occurs online or through the use of the Internet.

Now that you have a little background about foreign exchange and the Forex market, the next thing you should know is how this so called “exchanging of currencies” work and why you’ve been hearing the phrase “Forex investing” around you.

READ ALSO:  Investing In The Foreign Exchange Market: How Does Forex Trading Work?

Part 2: How Does Forex Trading Work And How To Invest On Forex?

About the author

Mark Holland

Leave a comment: