What is Forex? An Introduction to Invest Money in Forex Trading Markets

What is Forex? An Introduction to Invest Money in Forex Trading Markets

The act of trading has begun a long, long time ago – way back even before money has dominated the market as the main mode of exchange or payment. Our ancestors traded goods to one another. Those in the mountains traded their crops for fish from people in the lowlands and from those who live near the sea, and the other way around. As we can see, people from our history have done various forms of trade or exchange. These days however, trade involve money more often than not. A concrete example to this is Forex Trading.

Brief History

The gold standard monetary system which was created in 1875 proved to be among the most important happenings in the forex currency market history. One by one, each of the countries affixed an amount of their own currency to be equivalent to a single ounce of gold. The constant change of the gold’s price between two different currencies became the first ever standardized method of currency exchange in our history.

When the World War I took place, the gold standard broke down because of the major European powers not being able to have sufficient gold in order to exchange or trade for all the currencies which the governments were printing off by that time for completing various immense military projects.

Between the breakouts of wars, the gold standard was used yet again. However, when the World War II begun, most of the countries had dropped its use once more. Despite all of these though, gold retained its position as the ultimate figure of monetary value.

The Bretton Woods System was put into practice in 1944. Its implementation brought about the creation of fixed exchange rates. With this, the U.S. dollar replaced the gold standard as the major reserve currency. This also indicated that the U.S. dollar became the lone currency which would be backed by gold.

In the year 1971, the United States proclaimed that it would no longer accept the exchange of gold for U.S. dollars held in the foreign reserves. This then marked the Bretton Woods System’s termination.

The collapse of the Bretton Woods System eventually brought about the generally global recognition of floating foreign exchange rates in the year 1976. In effect, this was considered to be the birth or the dawn of the current foreign currency exchange even though it became extensively electronically traded ‘til the middle part of the year 1990s.

What is Forex?

‘Forex market’ stands for the foreign exchange market. Generally, it is the market wherein currencies of various types are traded. Currency trading is known to be the world’s biggest market which significantly consists of approximately trillions of daily volume. As more and more investors, individuals or companies alike, learn more of the benefits and opportunities which can be found in the forex market, it continues to grow very quickly as each day passes.

Aside from being the world’s biggest market, the foreign exchange market is also known to be the most liquid. This characteristic is what highly sets it apart from other markets. In addition to this distinguishing attribute, the forex market also does not have a central marketplace for the trading. As an alternative, the exchange of currency is carried out over the counter.

In contrast to the stock market, the decentralization aspect of the foreign exchange market allows traders to select from various dealers to whom they can perform trades with and it also significantly allows an easier way to compare prices.

In general, when a particular dealer becomes much larger, their access to pricing at the world’s largest banks also becomes much better and they significantly have the ability to pass that on to their current or prospective clients. With various different currencies being traded all over the world in all key financial centers, the spot currency market is open for 24 hours a day and for 5 days every week.

Characteristics of the Forex Market

The foreign exchange market is considered to be a rather unique market because of a number of reasons. To start with, the forex market is known to be among the small number of markets which is free from the controls of external parties and thus cannot be simply manipulated.

Aside from this, we have also briefly mentioned previously that one of the distinguishing aspects of forex is its liquidity, having trades which can range from about one trillion to one point five trillion U.S. dollars in a day. Having this large amount of money moving in a very fast manner, it is fairly fathomable why an investor would find it almost not possible to considerably affect a major currency’s price. In addition to this, the forex market’s liquidity implies that dissimilar to infrequently traded stocks, traders have the ability to open or close positions within just a number of seconds given the fact that there are always buyers and sellers willing to participate in the trade.

One more fairly distinguishing attribute of the foreign exchange market is its participants’ variance. There are various reasons which investors tend to have for coming into the market. Some investors are there to become long term hedge investors. Others make use of immense credit lines in order to search for huge short term gains. In a fairly fascinating way though, not like blue chip stocks which typically catch the attention only of long term investors, the combination of small but fairly constant currency price fluctuations forms a setting wherein investors with wide strategy ranges are attracted.

With all these though, it is very important to be also highly aware of the different risks that come with trading in the foreign exchange market. Just like with any investment endeavors, forex trading also carries with it certain levels of risk. Thus, it is very important to carefully consider all your options before making a decision. In order to make the most out of this venture, it is highly valuable to ask for the advice of an independent financial advisor, especially if you are just starting out.