You have perhaps travelled overseas, and needed to change money in order to be able to enjoy your trip?

If that is the case, then you have already been involved in the global forex markets, on a very peripheral level. However, you no doubt noticed that when you changed your money, there was commission to be paid to the company that changed your US dollars to Euros, or swapped your British Pounds for Australian Dollars.

You have therefore already seen how money is made in forex, although again, this is very small example.

forex markets

The word forex is itself an abbreviation of the phrase Foreign Exchange, referring to the practice of changing one currency for another. The forex market is also sometimes further abbreviated to FX.

And, to give you some idea of exactly where your own vacation based money exchanging activities fit into that the global foreign exchange picture, forex is by far away the largest financial marketplace on the planet.

It is a marketplace wherein something like $3.5 trillion changes hands every day, and it is a business that operates 24 hours a day. The first market in the world opens at 9 a.m. in Australasia, and forex business then continues unabated until the market finally closes at 10 p.m. on Friday evening in the USA.

There are several factors about forex market trading that differentiate it from trading other financial securities such as stocks and shares or commodities.

Firstly, there is no single ‘central point’ of any forex marketplace in any of the major market countries around the world. Not like if you wanted to trade stocks in London, then you have to use the London Stock Exchange, which is a physical place where stocks are traded from 9 a.m. until 5 p.m. If you wanted to trade on the forex exchange market in London, then there is not place that represents where the market is traded.

Secondly, there is no universally agreed foreign exchange rate like the price of stocks, shares or commodity contracts. The forex exchange rates are agreed between individual parties based on the specific forex deals. These deals are usually set up via the likes of major financial institutions, Governments and international banking corporations.

Before the internet made forex trading accessible to almost anyone who has a computer and an internet connection, most forex deals were transacted directly between one interested party and the other and generally handled by telephone.

For instance, if bank ‘A’ wanted to exchange one currency for another either on their own behalf or that of one of their major customers, they would ring round all the other banks to see what the best quote they could get would be. Consequently, in those days, the forex markets were dominated by what was known as the Interbank exchange rate.

Nowadays, markets have changed beyond all recognition to the way they were even as recently as only five years ago. Whereas in those days, large-scale forex trading was something that only extremely wealthy individuals, large corporations and banks would get involved in, it is now possible for anyone to trade the spot forex market online armed with nothing more than a few hundred dollars.

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