Forex

Forex

The Foreign Exchange Market was established in 1971, when fixed currency exchanges were abolished. Currencies became valued at floating rates determined by supply and demand. The FOREX grew steadily throughout the 1970's, but beginning with the technological advances of the 80's, this market expanded from trading levels of $70 billion a day to the current level of $1.5 trillion.

The FOREX is made up of about 5,000 trading institutions such as international banks, central government banks such as the US Federal Reserve, commercial companies and brokers for all types of foreign currency. There is no centralized location of FOREX, and there are major trading centers located in New York, Tokyo, London, Hong Kong, Singapore, Paris, and Frankfurt. All trading is done by telephone or Internet. Businesses use the market to buy and sell their products in other countries, but most of the activity on the FOREX is from currency traders who use it to generate profits from small movements in the market.

Until recently, FOREX was reserved for the huge players. However now, due to the changes in regulations, it is accessible to the small investor. Previously, there was a minimum transaction size and traders were required to meet strict financial requirements. With the advent of Internet trading, regulations have been changed to allow large interbank units to be broken down into smaller lots. Each lot is worth about $100,000 and is accessible to the individual investor through leverage loans extended for trading. Typically, lots can be controlled with a leverage of 100:1 meaning that $1,000 will allow you to control a $100,000 currency exchange.

There are many advantages to Trading in FOREX, one of which is liquidity. Because of the size of the Foreign Exchange Market, investments are extremely liquid. International banks are continuously providing bid and ask offers and the high number of transactions each day ensures that there is always a buyer or a seller for any currency. Another advantage is accessibility. The market is open 24 hours a day, 5 days a week. It opens Monday morning Australian time and closes Friday afternoon New York time. Trades can be done on the Internet from your home or office. The FOREX is an open market, and currency fluctuations are most often caused by changes in national economies. News about these changes is accessible to everyone at the same time, which means that there can be no insider trading in FOREX. The final advantage in the Foreign Exchange Market, is the fact that there is no commission to be paid. Brokers earn money by setting a spread, which is the difference between what a currency can be bought at, and what it can be sold at.

Currencies are always traded in pairs such as, the US dollar against the Japanese yen, or the English pound against the euro. Every transaction involves selling one currency and buying another, so if an investor believes the euro will gain against the dollar, he will sell dollars and buy euro's. The potential for profit exists because there is always movement between currencies. Even small changes can result in substantial profits because of the large amount of money involved in each transaction. By the same token, it can be a relatively safe market for the individual investor. In addition, there are safeguards built in to protect both the broker and the investor, along with a number of software tools to minimize loss.

The FOREX is in my oppinion, the best all around investment vehicle out there. Granted other markets do have their advantages, but there is less risk in the Foreign Exchange Market, along with the potential for earning large returns more frequently.