What is Forex ?


Definition

Forex (foreign exchange) market is an international market for the exchange of currencies. It is a place where the currency of a nation can be exchanged for a given amount of currency of another nation at an agreed rate. The rate at which the currencies are exchanged is called foreign exchange rate.

Evolution Of The Market

The need for a floating exchange rate system led to the collapse of fixed rate Bretton Woods System and the subsequent evolution of Forex market in the early 1970’s. The main objective of the foreign exchange market is to help and promote trade and investment among different countries. Currently it is one of the largest and most liquid financial markets in the world. The major participants in this market are banks, currency speculators, corporations, governments and other institutions. The main currencies traded here include Euro, Japanese Yen, British Pound and Swiss Franc. All these currencies are traded against the U.S. Dollar.

Prominent Features Of The Market

The Forex market has some unique features that make it distinct from other financial markets. Here are a few of the most important ones:

  • This market involves a huge volume of transactions. According to a survey conducted by the Bank for International Settlements in April 2007, the average daily turnover in the foreign exchange market was a whopping $3.2 trillion. This is more than nearly 10 times the average daily turnover in international equity markets.
  • The Forex market functions throughout the day without any time gap. It is open 24 hours a day and 5 days a week. This gives traders the advantage of moving in and out of the market at any time without facing a market gap.
  • The large volume of trading in the market makes it almost immune to the activities of individual participants. That is, a single participant cannot influence the functioning of the market.
  • Geographical dispersion is another major feature of this market. The market has no central location and thus trading can be conducted from anywhere in the world.

Advantages Of The Market

With its high liquidity, the foreign exchange market has turned out to be a highly attractive market for investors. This is because strong liquidity provides investors the freedom to open or close a position of any size.  Also, this market is considered to be more stable than other financial markets. This is because currency is a fully liquid commodity that would always be traded. Thus, unlike stock markets, which collapse with fall in prices, the Forex market is relatively stable.