Introduction to Forex Markets
The term “Forex market” is used very frequently in the media as well as in day to day life. It conjures up an image of a huge historic building somewhere in Canary Wharf or on Wall Street. However, that is not how the Forex market works. This market is unique in many respects and to understand it, one first needs to understand its unique characteristics. The unique characteristics of the Forex market are as follows:
No Physical Existence
The stock markets and bond markets of the world have a physical existence. If you wanted to visit the New York Stock Exchange or the London Stock Exchange, there would be a historic building that you would end up visiting. However, this is not the case with Forex Markets. Forex Markets do not have any physical existence. This means that there is no building anywhere in the world where Forex dealers are located and have designated the place to be the Forex Market.
Instead, the Forex market is made up of money changers all over the world. The market is interconnected via means of information. Earlier, the information was transmitted manually, now the information is transmitted via electronic means. Therefore, the currency dealer in your neighborhood as well as in a far off place like Mexico City together all constitute the Forex Market. The Forex market therefore constitutes an interconnected network of buyers and sellers.
Largest Market in the World
The Forex market is by far the largest market in the world. The daily transaction volume in the Forex market is over $4 trillion. This massive amount of money does not change hands even if we consider the imports and exports of the entire world for an entire year!
The trading volume in the Forex markets dwarfs the trading volume in all the stock markets of the world by a huge extent. Also, the trading volume is greater than some of the oldest and most advanced bond markets in the world. The Forex market is also the oldest financial market in the world which helps in making it the largest!
24 by 7 Market
The Forex market is the only 24 by 7 market in the world. This means that the market is operational all the time. This can be contrasted with stock and bond markets which operate for only a few hours every weekday. In case you want to buy or sell Forex there is always someone somewhere on the planet that is willing to sell it. If you are trying to sell in the middle of the night in the United States, maybe a buyer in China is willing to buy! If you are trying to sell your currency on a Sunday, buyers in the Middle East are transacting because they work on Sundays and have their week offs on Friday! Therefore the convenience and flexibility provided by the Forex markets is unparalleled.
Liquidity
The fact that the Forex markets are open 24 by 7 and have the largest trading volume in the entire world makes it the most liquid financial market. Anyone who wishes to buy or sell their currency holdings can do so in a matter of seconds with a mouse click and with minimum loss of value. Forex prices are readily quoted on a real time basis by various individuals and organizations in the world. Also, since there are so many intermediaries around the world that deal in these currency markets, the transaction costs for such trades is very low. These trades are carried out on a global scale and are not restricted by any geography. As such, there is minimal taxation on these trades!
Trading Options
The Forex market provides a wide variety of options when it comes to trading. There are long and short sides of any contract always available. Then there are contracts of various sizes and in various currencies. Also, the Forex market provides the investor with a choice regarding varying degrees of leverage. The amount of leverage provided by the Forex market is simply astounding. However, it is advisable that the traders exercise caution while using it.
The Forex market therefore has a lot of unique characteristics. These characteristics are important to get a first impression of this huge market. As we progress later in this module, we will realize that each of these characteristics has far reaching implications on the way trades actually happen and whether they are profitable or not!