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Forex trading When you think of markets, your first thoughts are probably of stock markets; your chance to own a piece of a blue chip corporation or the latest technology upstart, or even a government or institutional mutual fund. Maybe you even turn your mind to commodity markets, where commodity traders buy and sell things as diverse as oil, gas, live cattle and coffee. However, neither of these markets are the largest. The largest market in the world, based on cash value traded, is the foreign exchange, market or forex, for short. Various estimates state that the average daily value of trades taking place over forex trading is between $2 trillion and $3 trillion! The forex trading market is different from the widely known markets in one significant aspect: there is no centralized market organizing the trade in foreign currencies like the NYSE or the Chicago Board Of Trade. Instead, the forex trading market takes place wherever one currency is traded for another. What currencies are traded on the forex market? Any currency, of course, can be traded on the forex market – all you need is a willing buyer and a wiling seller. In practice, however, a small number of currencies dominate the forex market. The most heavily traded currency is the United States dollar. While the dominance of the United States dollar was once unassailable, it is now being challenged by the Eurozone euro, and the Japanese yen is still heavily traded. Rounding out the other major currencies are the British pound sterling, the Swiss franc and the Australian dollar. Who participates in the forex market? Since there is no centralized market for foreign exchange trading, forex trading is a rather exclusive club. Given the size of the forex market, you have to be a major institutional presence to effectively participate. Not surprisingly, the primary players in the forex market are banks. The core of the forex market is the inter-bank market, where massive investment banks trade billions of dollars worth of currencies with each other. Central banks – like the U.S. Federal Reserve or the Bank of Canada – also play an important role as they intervene in the forex market to help control the price of their own currencies. Hedge funds and other investment firms with significant holdings are also involved in the forex market. Can individuals participate in the forex market? As discussed above, large institutions such as banks dominate the forex trading scene. Retail investors make up a negligible amount of the market; nonetheless, given the size of the forex market, this still accounts for as much as $50 billion a day and is growing. However, because forex trading is largely unregulated, investors should be careful before putting any money into the market. A large number of scams have come out in recent years promising access to the inter-bank market. As always, be sure you know what you are investing in before you give your hard earned money to someone else to invest. |
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