Usually when we talk of a market place, we are referring to the buying of products and services in exchange of money but there is a whole other kind of market. This is the foreign exchange market, a global money market where the business is trading currencies.
Commonly shortened to Forex, the foreign exchange market is a market where money is exchanged for money. This is done based on speculation on the exchange rates of various currency trades. The aim is to get a much as possible of the currency that is high and in demand and selling these to those who need it.
Fore is carried out via a large network that links banks, companies who trade in international currencies and individuals who are seeking to trade one kind of currency for another. These are exporters, importers, international corporations, day traders or short-term players, long-term international investors and dealers whose business is specifically buying and selling currencies. Apart from trading purposes, there are also those who play in the Forex market with the aim of reducing the risk posed by currency movements upwards and downwards that would compromise the value of their investments.
The players in this chain stay up to date about current exchange rates and communicate with each other using the internet, telephone and fax. In this network, there is no set exchange for currencies that are being traded. As such, Forex is taken to be an over the counter market.
One main characteristic of the currency exchange market is that it is a very liquid market. This means that there is never a lack of buyers and sellers to buy and sell the currency one wants to trade in. This means that it is easy to make a quick buy or sale. This translates into very high daily sales averages, which was put at $1.9 trillion in April 2004.
Another fact about the currency exchange market is that it is a market that never closes, more so in major capitals like Tokyo, London and New York. Thus, traders can immediately react to changes in currency values to maximize gains. They can also act to minimize losses.
The last feature of the currency exchange market is that it is a low cost operation, despite the high daily average. Traders will incur costs in form of a spread and a commission for their brokers which can range from as low a $20 to $150 which depends on the trade volume. Traders do have the option of trading currencies directly with the market players and incurring only the cost of the spread and the price at which a trader will buy currency from a seller.