The Forex (short for “foreign exchange market”) or Foreign Exchange market, is a type of decentralized global market where international currency purchases are made. financial centers around the world function as anchors of trading between a wide range of buyers and sellers, twenty four hours a day, except weekends. The Forex market determines the relative values of different currencies.
The Forex Market is a useful tool for international trade and investment by enabling currency conversion. For example, it allows a business to US imports products from the European Union, especially Eurozone members and pay them in euros, although its revenues come given in dollars. It also supports direct speculation on the value of currencies and carry trades, speculative operation on change in interest rates of two currencies.
In a typical foreign exchange transaction, a party acquires a certain amount of one currency by paying a certain amount of another. The market for modern foreign exchange market began to form during the 70s of last century, after thirty years of government restrictions (the Bretton Woods system established the rules for commercial and financial relations between the most industrialized countries in the world after World War II) when countries gradually moved from the old to the floating exchange rate regime or flexible exchange rate, which was fixed by the Bretton Woods system.
The Forex market is unique for the following reasons:
Its huge trading volume representing the largest asset class in the world with high liquidity.
Its geographical dispersion.
Continuous operation: twenty four hours a day, except weekends.
The variety of factors that affect exchange rates.
The relative low profit margins compared to other markets or fixed incomes.
The use of leverage to enhance profit margins and losses, and relative to the size of the account.
Therefore, the Forex market has been rated as the type of market that is closest to the ideal of perfect competition, notwithstanding currency intervention by central banks.
-Characteristics Market and legislation-
There is no unified or centralized for most market transactions, nor a defined cross-border regulation. Each country has its own regulations to regulate operations in the Forex market, usually requiring licenses to entities or persons involved in this activity.
In the United States, for example, regulation is done by the CFTC (Commodities and Futures Trading Commission). In London, this task is performed by the Security Futur Asociation. However, there are countries where transactions in the Forex market are not regulated, as is the case of Mexico, for example.
This implies that there is no single exchange rate, but a variety of types (prices), depending on what bank or market is performing the transaction and where you are. In practice, the exchange rates are often very similar; otherwise, they could be exploited instantly with the method of arbitration. Due to the dominance of London on the market, the market price of a particular currency is generally the market price of London.
Although the main market is in the capital of the United Kingdom, New York, Tokyo, Hong Kong and Singapore they are also important centers. banks around the world are also involved.
Currency trading happens continuously throughout the day; when the Asian session ends, begins European, followed by the North American session and then back to the Asian session.
Forex trading can be a lucrative opportunity for less experienced investors, since, in principle, the Forex market is open to anyone who wishes to participate.
However, one must take into account certain risk factors to which the investor is exposed, the main the possibility of political or economic changes do fluctuate negatively the price and liquidity of currencies.
Furthermore, the possibility of leverage means that any movement in the market have a proportional effect on the deposited capital. This can affect for or against the investor. There is a possibility that substantial losses that the investor would be responsible only be suffering. There are also risks related to the use of computer programs created to operate in the Forex market via Internet (application failures or the equipment itself), not to mention fraudulent websites that supposedly invest in the Forex on behalf of the client and both have proliferated Network in recent times.