The Forex market is the biggest and most liquid financial market in the world. It is a global market that deals with an average daily volume in excess of $3 trillion dollars. There is no central market for currencies unlike stocks where most of the transactions are done through exchanges such as the New York Stock Exchange. Instead, it is traded over the counter (OTC) in which banks all throughout the world play a significant part on determining the value and liquidity of their currencies.
Since it is traded over the counter or the inter-bank market across the globe, Foreign exchange is a 24 hour market and follows the sun around as it passes major financial centers like London, New York or Tokyo. Almost everybody is involved either directly or indirectly when referring to the Forex market. On a micro level, when you buy something at the store or anything that you use your money for contributes to the total activity for that currency you're holding. The greater the activity for the currency the greater the demand for it. Demand is what determines its price in comparison with other currencies.
Currency movements are somewhat slower when compared with most stocks, therefore returns are less than what stocks could deliver. For instance, with a $10,000 principal, a movement from $22 a share to $23 would produce a $454 gain. When trading currencies, a $10,000 principal invested in the Yen would deliver $84 should the Japanese Yen strengthened from 120 to 119 against the US Dollar. Due to that small price fluctuations in currencies, only big banks, hedge funds or insanely rich private investors could harness significant gains from currencies with trading sizes of over $1 million. It all changed with the advent of electronic trading where individual traders could finally participate directly with the currency market with as little as $500 and produce returns greater than what stocks could produce.
ADVANTAGES OF TRADING CURRENCIES
- 24 hour market (6 days a week)
- No commissions (Brokers profit from the bid and ask spread as little as .01%)
- High leverage up to 200:1 (can borrow up to 200 times your trading capital)
- Profit from a rising or falling trend (Can short a currency pair without an up tick)
- Trade the most liquid of all assets.