The vast currency market is a foreign concept
to the average individual. However, once it is broken down into simple
terms, it becomes understandable to most people. If you can do this then
you too can take the first step toward financial success and a lifestyle
many envy.
You may not be aware of this but your already participating in the Forex
market. The simple fact that you have money in your pocket makes you an
investor of currencies. Your purchase of stocks, bonds, and other
investments, along with money deposited in your bank account represents
investments which rely heavily on the integrity of the value of the
currency in which they are denominated.
In other words, you have a bias, albeit it is an unconscious one.
Due to the constant international trade (buying and selling of goods
and services) and the resultant fluctuation in exchange rates, the value
of your personal assets constantly change, thus affecting your overall
financial status. Keeping this in mind it should really come as no
surprise that many shrewd investors have taken advantage of the
fluctuation in exchange rates to make money, either as speculators or as
buy and hold investors (most recently Mr Warren Buffet).
The foreign exchange market has experienced many changes since its
inception. For years, the United States and its allies, under the Bretton
Woods Agreement, participated in a system in which exchange rates were
tied to the amount of gold reserves belonging to the nation. However in
the summer of 1971, President Nixon took the United States off the gold
standard, and floating exchange rates began to materialize. Today demand
for a particular currency is the driving factor in determining exchange
rates. Decreasing obstacles and increasing opportunities, such as the
fall of communism and the dramatic growth of the Asian and Latin American
economies have created new opportunities for investors. The dawn of the
Internet and related technology found many applications in the financial
services industry globally.
Increasing trade and foreign investment have made the economies of all
nations more and more interrelated. Regularly reported economic figures
around the world, such as inflation or unemployment levels, as well as
unexpected news, such as natural disasters or political instability,
alters the desirability of holding a particular currency, thus
influencing international supply and demand for that currency. All
currencies fluctuate constantly against the currencies of the rest of the
world. The current web of international trade and the resultant
fluctuations in exchange rates have created the world's largest
market---the foreign exchange market.
The foreign exchange market is a cash interbank or interdealer market.
Foreign exchange, however, is not a "market" in the traditional
sense since there is no centralized location for trading activity.
Trading occurs over the telephone and through computer terminals at
thousands of locations worldwide. The direct interdealer market consists
of dealers with currency settlement capabilities trading as principals.
It is this dealer segment of the market that is responsible for
generating a large portion of the overall foreign exchange volumes.
Trading between dealers creates the largest turnover in the market,
making foreign exchange the most liquid of all markets.
Trading approximately $3.2 trillion every day (according to the latest survey by the Bank for International Settlements), the foreign exchange
market is the largest financial market in the world. Traditionally, the
foreign exchange market has only been available to banks, money managers,
and large financial institutions. Over the years, these institutions,
including the U.S. Federal Reserve Bank, have realized large profits
through currency trading. This growing market is now linked to a
worldwide network of currency traders, including banks, central banks,
brokers, and customers, such as importers and exporters.
Today, the
foreign exchange market offers opportunities for trading not only to banks
and institutions, but to individual investors, financial market
speculators and a new breed of online trader.
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RISK WARNING :
Customers should be aware of the risks associated with over-the-counter, spot Forex trading. In the off-exchange market, also called the over-the-counter market, a retail customer trades directly with a counterparty and there is no exchange or central clearing house to support the transaction. Forex trading can be highly speculative in nature, which can mean prices may become extremely volatile. Forex trading can be highly leveraged. Since low margin deposits normally are required, an extremely high degree of leverage is obtainable in over-the-counter trading. A relatively small market movement will have a proportionately larger impact on the funds you have deposited. You may sustain a total loss of your funds. Since the possibility of losing your entire cash balance does exist, speculation in the over-the-counter market should only be conducted with risk capital you can afford to lose and which will not dramatically impact your lifestyle.
Leverage risk
Forex trading can be highly leveraged. Since low margin deposits normally are required, an extremely high degree of leverage is obtainable in over-the-counter trading. A relatively small market movement will have a proportionately larger impact on the funds you have deposited. You may sustain a total loss of your funds. Excessive leverage increase this risk.
