25.2.07

How FOREX Works


Transactions in foreign currencies are not centralized on an exchange, unlike say the NYSE, and thus take place all over the world via telecommunications. Trade is open 24 hours a day from Sunday afternoon until Friday afternoon (00:00 GMT on Monday to 10:00 pm GMT on Friday). In almost every time zone around the world, there are dealers who will quote all major currencies. After deciding what currency the investor would like to purchase, he or she does so via one of these dealers (some of which can be found online). It is quite common practice for investors to speculate on currency prices by getting a credit line (which are available to those with capital as small as $500), and vastly increase their potential gains and losses. This is called marginal trading.

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Forex, or FX, stands for the foreign exchange market. This is a 24-hour market in which currencies are traded in cash, which is known as a spot market. There is no central, standard trading center, such as, a stock exchange. Instead, trade is conducted "over-the-counter" via an international network of dealers. Until recently, the forex market was confined to larger traders: major, international commercial and investment banks; international corporations; international money brokers; currency traders. When the United States went off the gold standard in 1971, investors immediately recognized new opportunities for making profits. Every year, more companies start up that cater to smaller institutions and investors so they may participate in spot forex trading. A prime factor to take into account before participating in the spot market is your temperament. A risk-aversive customer is not suitable for this marketplace. You should consider not only your experience in the investment world, but your objectives, and your capacity to absorb financial losses. Certainly, you should never invest any amount of money you cannot afford to lose.