the foreign exchange or forex market isthe world's largest financial market the forex market plays a vital role in theglobal economy every day trillions of dollars are exchanged from one currencyto another currency exchange is essential for international business andthe forex market makes this happen forex market participants includegovernments businesses and of course investors governments use the forexmarket to implement policies for example when conducting business with anothercountry whether it's borrowing money lending money or offering aid a countryneeds to convert its currency into another foreign currency businesses canparticipate in the forex market to facilitate international tradebusinesses require the forex market to convert payments for goods and servicesbought overseas or to exchange payments from international customers into theirpreferred currency and advanced investors use the forex market tospeculate on changes in currency prices currency prices change almost constantlyduring the week because the forex market is open 24 hours a dayexcluding weekends during the week it has to be open around the clock becauseof the global nature of the economy investors profit when they buy acurrency and its price increases investors can also sell or short acurrency in anticipation of a price decrease currencies trade in two pairswhich means the value of one currency is always stated relative to anothercurrency the two-sided nature of pairs is a little confusing at first but inpractice it's quite simple let's look at an example trade using the euro USdollar currency pair even though there are two currencies involved the pairitself acts like a single entity similar to a stock or commodity let's supposethat an investor thinks Europe's economy is going to grow faster than the UnitedStates and as a result she thinks the euro will strengthen against the USdollar she can buy the euro US dollar pair to speculate on her assumption ifthe pair Rises she'll make money conversely if the pair fallsshe'll experience a loss investors buy and sell currency pairs using margin theprocess of buying and selling investments with margin is muchdifferent than buying or selling an investment like a stock margin isborrowed money used to purchase securities in a margin account theamount of margin you'll need varies between currency pairs and the size of atrade currency pairs typically trade in specific quantities known as Lots thereare several different lot sizes but the two most common are standard and minithe margin requirements for mini Lots are usually around $100 and standardLots are around $1, 000 these margins might seem like small dollar amounts butit's important to understand that the Lots are highly leveraged leverage isusing a small amount of money to control a very large amount of currency mostforex investors buy and sell currency pairs using leverage in fact leverage isa key feature of this market the leverage associated with currency pairsis one of the biggest benefits of the forex market but it's also one of thebiggest risks leverage gives investors the potential to make large profits orlarge losses that's because losses from investmentsusing leverage can grow exponentially and spiral out of control but ifinvestors manage risk and limit leverage they can possibly capture the benefitsof forex investing these benefits include the ability to trade 24 hours aday and capitalize on different market trends as stated earlier the forexmarket is by far the world's largest financial market with trillions ofdollars changing hands every day the sheer size of the forex market means itcan influence other asset classes such as stocks bonds and commodities forexample if the US dollar experiences a downtick it impacts commodities becausethey're typically priced in u.
s.
dollars this in turn raises the costs of goodsand is inflationary as a result interest rates may rise causing bond prices tofall all of this can impact the stock market as you can see one change in theforex market can have a ripple effect across several markets this is just oneexample of how the forex market can influence other asset classes becausethe forex market is the world's largest financial market it sets the foundationfor how other asset classes perform the forex markets widespread influence mayappeal to investors who are interested in global economics these investors likelearning about their countries their currencies howthese pieces all fit together and how the global economy works investors whoare less interested in learning about connections between various globalmarkets might consider a less risky method of forex investing such ascurrency exchange traded funds or ETFs these funds can be a less risky way toinvest in a currency and can potentially be an effective way to diversify yourportfolio but whether you're interested in trading the forex market or buyingcurrency ETFs it's important that you learn more before making a trade.
