People tend to think of money in terms of their own country's currency. However, international buyers and sellers often want to do business in a currency other than their own. For example, many businesses located in emerging countries prefer to do business in the U.S. dollar. When these situations arise, people turn to the FOREX.
FOREX is the word used to describe "The Foreign Exchange". "FX" is a shorter term which is also used. The FOREX is where people can buy and sell any of the world's currencies. Don't confuse the FOREX with the currency exchange kiosks that you see at the airport. While the kiosk may be dealing in the FOREX, you are not. The FOREX is no place for amateurs. Many FOREX dealers and traders have MBA, or Master's degrees in subjects like finance or mathematics. Nearly $1.2 trillion dollars are traded every day far outstripping the relatively paltry $50 billion that gets traded in NYSE transactions. In fact, FOREX trading is becoming so popular that many universities offer specialized courses on currency trading.
Let's say that a company in Mexico wants to buy oil from Saudi Arabia. Mexico uses the "peso", and Saudi Arabia uses the "ryias". The Saudi's tell the Mexicans that they want to be paid in U.S. Dollars, so the Mexican company goes off to the FOREX to sell their pesos and buy US dollars. The amount of pesos that the mexican company will have to pay in order to buy the equivalent amount of US dollars is called the "exchange rate".
Unlike the New York Stock Exchange, there is no central headquarters for the FOREX. It is actually a network of buyers and traders who are all connected via telephones, computers, and, in some areas still, the TELEX machine. Although there is no FOREX headquarters, there are some large hubs of traders who are located in the US, UK, and Japan. The other hubs include Singapore, Switzerland, Hong Kong, Germany, France and Australia.
The FOREX is "open" 24 hours a day. London opens first at 8 AM (GMT) which is right at the time that the trading day is coming to an end in Singapore and Hong Kong. Then at 1 PM (GMT), the NY market opens. Four hours later the San Francisco market opens and right at the time that San Francisco closes for the day, the Singapore and Hong Kong markets are opening up again.
There are four authorized FOREX trading types. They are banks, brokers, customers, and central banks with banks being by far the largest participant in the trading process. Banks earn a good profit buying and selling currencies between themselves. Approximately two-thirds of all FOREX transactions involve banks.
Typically brokers put together the transactions between banks using dealers as intermediaries. This allows the actual banks to remain anonymous in the transactions. Brokers charge a commission on each deal that they put together. Some large customers, that buy and sell currency regularly, maintain their own trading desks and trade in the FOREX directly.
Central banks are banks which trade on the behalf of their government, very often in an attempt to manipulate the value of their country's currency on the world FOREX market.
Others treat FOREX trading as an investment activity and earn profits from the fluctuations between currency rates, while others "hedge" their money in the FOREX to protect themselves from sharp currency drops.
Can individual investors trade in the FOREX? Sure they can. While the bulk of FOREX transactions are still institutional, there is an opportunity for the average day trader or investor to participate with bids starting as low as $250.
There are hundreds of companies, around the world which offer online FOREX trading to the average person with little or no currency trading experience.
FOREX trading in the U.S. is regulated by U.S. Commodity Futures Trading Commission which oversees the FOREX trading companies and their advertising and business practices. It makes sense that this is the regulatory agency of choice, rather than the Securities & Exchange Commission (SEC), because FOREX trading is a whole lot like commodities trading at its core. The biggest similarity is the fact that an investor can use the principle of "leverage" when they trade.
With leverage ratios as high as 100:1 being offered, an investor can put up $1000 to control $100,000 of their chosen currency. If, for example, the trader "bets" that the dollar will rise against the YEN by 1%, and that comes to pass, then they can walk away with $2,000 and a quick 100% profit on their $1,000 investment. If the deal moves the other way, however, their $1,000 evaporates and they're left with nothing.
The jury is still out on whether FOREX trading is safer (less riskier) than trading in equities. Advocates of FOREX are quick to point out that it is highly unlikely that a nation's currency is going to melt down overnight, but investor's in companies like Enron realize that the same is not true when you own a shaky company's stock.
Not according to Federal Reserve Chairman Alan Greenspan who was recently quoted as saying "no model for predicting currency movements beats flipping a coin".
In spite of all that, individual "mom and pop" traders are being drawn to the FOREX in record numbers with new traders coming into the market every day. One of the lures is the fact that, except for weekends, the FOREX market is open 24 hours a day somewhere in the world and you can trade from your PC day or night.
FOREX trading involves high risks and you definitely want to read up on the subject before sticking your toe in the foreign currency market. The water could be a lot colder than you expected!
However, if you have a yen for some YEN, and you've got the money to back you up, then trading in the FOREX could mean more money in your pocket. Like any other investing, never risk more than you can afford to lose. Good luck in FOREX!