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The foreign exchange market, commonly referred to as the Forex, is the financial market where currencies are traded. Forex traders exchange currencies that they expect to hold or decrease their value for currencies they expect to rise. For instance, if the investor believes the US dollar will remain static while the euro increases in value, they will trade their dollars for euros. If the euro does rise, the investor will exchange the euros for dollars, getting more American money back than they put into the trade.
The Forex market is the world’s single largest financial market, three times the size of every other stock and futures market combined. It dwarfs behemoths such as the New York Stock Exchange; close to four trillion US dollars worth of currency is traded every day in the Forex market, compared to the fifty-five billion dollars exchanged on Wall Street. Large banks, corporations, and national governments exchange currencies alongside small investors and traders hoping to scalp a profit off market movements.
The Forex market has no central location. Small trades are executed by brokerages and all currencies are exchanged by banks. While currency trading is done worldwide, almost thirty-five percent of Forex trading takes place in London, with New York and Tokyo trailing behind at seventeen percent and six percent, respectively. Due to its global nature, the Forex is open twenty-four hours a day, six days a week.
There are many different currencies traded on the Forex market, but the five most common are the US dollar, the Euro, the Japanese yen, the UK’s pound sterling, and the Swiss franc. The US dollar dominates the market, making up over eighty percent of the monies traded. Most of the currencies are exchanged by large banks, with Germany’s Deutsche Bank, Switzerland’s UBS AG, the UK’s Barclays Capital, and the US’s Citi processing over fifty percent of the transactions.
Individuals considering investing in the Forex market should educate themselves on the risks. While the volatility, liquidity, and sheer size of the Forex market makes it an attractive option to investors, the opportunity for loss is as great as the opportunity for gain. The Forex market is especially sensitive to world events, fluctuating widely from variables such as geopolitics, natural disasters, and individual nations’ economic outlooks.
Also, individual investors usually trade on margin—essentially purchasing currencies on credit—magnifying their susceptibility to profit and loss. Forays into the Forex market are best made by investors who have studied the market, given careful thought to their risk tolerance, and are in a financial position to withstand losses when they come.