Categorized | Investing

The Forex Market: The Largest Financial Market In The World

Technology has changed the world we live in. Every industry in the business world has been revolutionized by the advance of the internet over the last 15 years, but one could argue that the forex industry is at the top of that list (of changed markets).

Forex is an abbreviated form of “foreign exchange.” The Foreign Exchange Market is where traders trade money. In the stock market, traders trade stock. But in the forex market they trade currency. To understand it in real terms, let’s break down a real-life example.

forex-markets

Forex Explained

If you travel to Paris for vacation (for those of you who are travel inclined, check it out! 36 hours in Paris!), for example, you will most likely need to convert your U.S. Dollars into Euros. When you approach the currency exchange counter to trade US Dollars for Euros, you are trading in the forex market! Let’s assume that you want to exchange $100 for Euros. At the current exchange rate, you would receive about 70 Euros. Essentially, you just sold $100 and you bought 70 Euros.

How Much Is Traded In Forex?

Now, this happens on a millisecond basis in the forex market to the tune of about $4 trillion a day. That is how much the Bank of International Settlements estimates is turned over each day in the foreign exchange market. The New York Stock Exchange experiences about $75 billion a day in turnover. Thus, the FX Market is roughly 40 times larger than the NYSE!

Who Trades Forex?

The main players in the forex market, however, are not people exchanging money when they are on vacation. In fact, that is a very small percent of the average daily turnover. The main players in the forex market each day are central banks and governments, hedge funds, large banking institutions, and very wealthy, sophisticated investors.

Until the late 1990’s, in fact, the only players allowed in the forex market were banks, hedge funds, and very wealthy people. The reason is rather simple. The minimum contract size during those days was generally $1,000,000, which meant that a market participant needed at least that amount just to hold 1 contract. This minimum contract size made it essentially impossible for most people to trade in the FX Market. Today, however, the advance of the internet and technology has opened the door for small, retail online brokerages to open up shop.

Advantages of the FX Market

The FX Market operates on a 24 hour basis. Liquidity and market action simply flow from one time zone to the next as Central Banks and large financial institutions open and close shop each day. This schedule makes it much easier for U.S. businesspeople to trade the FX Market because they are able to trade before and after normal working hours.

The FX Market is not only the largest financial marketplace in the world, but it is also the fastest growing. The Bank of International Settlements estimates that average daily turnover in the FX Market will reach $8 trillion by 2020, which means the Forex Market is a growth industry, set to expand in the coming decade.

Disdvantages of the FX Market

These advantages aside, there is also a high risk trading the forex market. As with any investment or trading, the risk of loss is substantial and forex trading is not suited for everyone.

Learn as much as you can about the dynamics, factors and risks before considering trading. There are also many professionals out there, as well as great courses and training material, that you should consult prior to making your decision.

To Forex, or Not to Forex?

Should you invest in Forex? That entirely depends on a few things… 1) Your comfort level, 2) Your current financial situation, and 3) Your willingness to learn about financial markets and stay abreast of the current markets.

MLR’s Note: I don’t think this is as simple as putting your money in a Target Retirement Fund and forgetting about it, so make sure you educate yourself before making any risks!

Get to know the author!

Tom served as CFO for various Visa International entities from 1980 until 1999, retiring with the title of Group EVP and Treasurer. Mr. Cleveland earned an engineering degree from Georgia Institute of Technology and did graduate work in Finance at Georgia State University.


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26 Comments For This Post

  1. Dana Says:

    Forex is surely a high risk trading but of course, there is a lot of potential benefit in it. I think the big potential benefit which make forex become very large.
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    [Reply]

  2. Kostas @ Generate Income Says:

    More and more people start trading on forex but it really requires skills and knowledge if you don’t want to lose your money so before you start trading with your money you should first try trading forex on a demo account and read a lot books about money management and trading psychology
    Kostas @ Generate Income´s last [type] ..A Beginner’s Guide to Forex Trading

    [Reply]

  3. valutakurser Says:

    What is best to invest in? Oil? Gold? Forex? hmm i don´t think anyone can give a clear answer, but forex trading on the internet is clearly the future, but isen´t this for banks relastates?

    :)
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  4. Jim Says:

    Forex is a journey of constant learning as the markets are always changing. If trade like a small player, i.e long/short a position and hope for the market favor to your side, most of the time it would not last long. Instead trade like a big player, will make money long term, no matter where the market go.
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  5. Jessica Says:

    Another disadvantage, forex market is largely unregulated. Forex may sound like an exchange but it isn’t. It exists entirely in cyberspace with every broker and every bank having different prices for any particular currency. There is no regulation, even for brokers who register with the CFTC and the NFA. Forex brokers do not have to mark to market each day as do futures brokers. If your forex broker files for bankruptcy or absconds with your money you
    have zero recourse.
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  6. Charlie @ Forex Hombre Says:

    This a good little introduction to the world of Forex trading. Here’s a little tip always trade or invest money you can afford to risk. Happy Trading !! .
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  7. MakeForexPay Says:

    Foreign exchange, better none as Forex, is a market of trading in which the commodity is money itself. Traders are always buying and selling in the Forex market, exchanging pounds for yen, dollars for euro, etc.

    [Reply]

  8. les Says:

    When trading the forex market you have to really be on your game as they move so fast, because it is actual money being traded you have no problem trading, you will always be able to buy and sell, but get educated before you start and only trade money you can afford to lose, happy trading
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  10. Mark Lorensen Says:

    If you really enjoy taking risks then Forex is for you. But as they say, the higher the risk, the higher the return. I am definetly a risk taker!

    [Reply]

  11. Aiden moor Says:

    Definitely Forex is the best platform available these days which a person can trust if they are keen to invest their money in various financial market

    [Reply]

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    [Reply]

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  14. Joe Prateleira Says:

    Forex is for who like to bet! And as they say, the higher the risk, the higher the return. I am a risk taker!
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  18. Accountingdiaries.com Says:

    As mentioned above forex can be risky but it can also be profitable. The bad thing is that people tend to see forex as a fast way to become rich which is of course far from being true. That’s the number one reason that people lose their money too…
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  19. Phil Moore Says:

    An interesting article and perhaps all the more interesting given the volatility in the markets at present. The good thing with Forex is that you can at least profit when the markets are going down as easily as when they are going up. There are certainly some good opportunities lining up in the near term. Sterling in particular looks week and the Euro good well be a long term be for a a drop.
    Phil Moore´s last [type] ..Weekly Market Outlook 11/02/2013

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  20. wealth management baltimore Says:

    The foreign exchange market assists international trade and investment by enabling currency conversion.

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    The Forex market is a high-risk way to try to get some extra cash. I’ve got lots of friends who have lost all their savings, because they thought they can easily double them, thanks to Forex..

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  24. Gianluca Says:

    I believe we all do have such friends. Lots of people are eager to make easy cash. There is no easy cash. Forex wouldn’t exist if it was so easy to multiply your money there.

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