What is Forex?
The Foreign-Exchange Market, or Forex for short, is the world's largest market. Many investors, especially many in Western countries, are more familiar with the stock and equity markets. Forex is an important element in the ever-changing connection between international trade.
A Forex trade – even if you are not aware of it – has probably already been placed. Have you ever withdrawn money from an ATM in a foreign country and had to pay in another currency? Yes, that was a Forex trade. If you have flown into an international airport and seen blinking rates, those are all bids and offers to place foreign exchange trades.
No doubt you have purchased an item on Amazon or a Black Friday Sale from a foreign company. Yes, there was a Forex transaction behind that sale.
The trading of stock and currency, popularly known as Forex, is like oil for the cogs of global trade. In today's global economy, currency transactions has never been more vital, and as globalization has taken hold of the world, the necessity for FX to facilitate those trading relationships has never been higher.
Many Japanese car manufacturers want to sell their cars in the United States. If they want to do this, they will need to think about the exchange rate between US dollars and Japanese yen. If the dollar has strengthened, so the Japanese company can bring back more money from each car sold in America, given that the dollar is stronger. If the exchange rate weakens, this car company may lose money on the sale of that car. It is because there was a 'bad trade' of its currency.
Exchange rates are things that change over time. If you ignore these changes, it can be risky for your business. Many companies trade in currency markets. It is hard to know the value of your money because it changes. So these companies trade their currency to keep up with this change.
In many situations, the auto manufacturer will outsource this work to one of the big banks, which places a high emphasis on foreign exchange transactions. Given the risk of wild price swings, and given that these markets have a high level of volatility, many hedge funds or pension funds with a speculative inclination will flock to them.
The vast majority of professional traders and institutional investors have chosen to trade directly on the futures market, which is where FX as a whole derives its name. This activity from these "major" market participants is what makes Forex the world's biggest market.