By: Seomul Evans
Submitted: 2009-06-01 20:02:09 | Word Count: 599
Forex which is the short form of Foreign Exchange refers to the process of exchanging currency of two countries. This means that currency of one country is exchanged with the currency of another and in this process the floating exchange rate is maintained. Trading of currencies take place majorly when there are transactions between different countries and the trading takes place in pairs like Euro/Dollar, Dollar/Yen.
People usually trade in Forex to reap profits arising out of such deals. If the currency of one nation has a higher appreciation in value than the other at some point of time, you can exchange the currency currently and hold it till the time comes when the appreciation in value takes place for the first currency. At that time you can exchange it back and get a higher amount of the second currency for the same deal and thus make a profit.
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Because of its global nature, the Forex market is active for 24 hours and functions even on major holidays. The turnovers on Forex markets are very huge and thus no investor has any problem. Major banks and financial institutions take care of the transactions. Instructions are given to the brokers from the clients sometimes for take profit or stop loss situations, where the brokers act accordingly in absence of the client. For investment purposes four major currency pairs are used and they are Euro/US Dollar, US dollar/Japanese yen, British pound /US dollar, and US dollar /Swiss franc.
The forex market is very liquid in nature and because the flow of money is so smooth, it is a lucrative business for many. However, earlier, low budget investors were unable to invest their money in this as the minimum amount of investment was very high and it included a lot of paperwork and rules and regulations to be fulfilled. At that time only major banks and financial institutions took part in these transactions and made huge profits. But now with the help of these financial institutions only and with help of brokers, Forex market dealings is within reach of common man. The more the amount invested, the more the profit yield out of the transaction when currency rates go high.
You can find many similarities between the stock exchange market and Forex market as far as way of dealing is concerned. Both function in the same manner and if you understand the dealing of shares, it is very easy to understand dealing in exchanges. However the difference is, you do not get dividends in currency exchange unlike dividends received in any of the share dealings.
Forex market is a good medium to make quick profit in times of fluctuating exchange rates. Since it is opened 24 hours, it is easier to track rates and decisions regarding sale or purchase of currency can be taken immediately. It is also liquid market and so money is not blocked in it. This gives the investors the freedom to move in and out of the market according to their will.
However, there is one disadvantage of these kinds of dealings, the leverage is very high and is much more than leverage in equity market. When there is profit then it can be an euphoric high but when the rates are lower than the rates purchased, the loss can really hurt.
Another disadvantage with the Forex market is that it is a very unregulated market. The regulations under law for financial institutions are there but there are none for brokers and dealers. You have to be careful if you intend investing in the Forex market.
