Fundamentals of FOREX

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The Fundamentals of Forex

To be able to truly understand the concept of Forex, you must first be able to grasp the basics. Forex is a contraction of the words Foreign Exchange. It refers to the trading that takes place in the foreign exchange market. The exchange involves the transaction of foreign currencies against the value of one another.  The trading is typically conducted by investors and speculators.

The Facts about Forex

The foreign exchange market is a platform where currencies are traded. Currencies are valuable commodities to people, vendors, and organizations across the globe. This is because currency is required to be exchanged to allow foreign trade and business to be conducted. One currency needs to be traded in an amount that is equivalent to the foreign currency.

It is this need of currency, both local and foreign, that allow the forex market to be the largest in the world. It is even greater than the stock market, and boasts a daily volume of over $5 trillion. Another distinctive element of the forex market is that it is not centralized. All of the transactions take place electronically. The exchanges take place through computer networks amongst traders around the world. The market operates constantly, and is never closed. The most active cities in the market are London, Hong Kong, New York, Tokyo, Zurich, Frankfurt, Paris, Singapore, and Sydney.

How Forex Works

There are three main ways that investors trade on forex: the spot market, the forwards market, and the futures market.

A spot market is where currencies are purchased and sold at recently quoted prices. This price depends on the demand as well as the supply of the currency. It is indicative of several factors including the current economic situation, political situations across the globe, interest rates and opinion of future activity of currency.

The futures and the forwards market do not actually conduct transactions based on actual currency. Rather, they deal in contracts regarding a future exchange of currency. These contracts document the rights to a specific amount of a certain type of currency. An impending date of the contract is agreed upon.

In the forwards market, the contracts are purchased and sold over the counter among two entities. These parties agree upon the terms and the conditions of the contract. In the futures market, the contracts are exchanged on public commodities markets. The contracts that are exchanged are determined by customary size and reimbursement dates. There are specific authorities that regulate the futures market.

The parties who exchange forwards and futures contracts are legally obligated to fulfill the terms of the contracts. These contracts are usually settled with cash when the contract expires. They can be bought or sold prior to the data of expiration. Trading in these markets lowers the risk involved when exchanging currencies.

It is important to always have the appropriate amount of information before you begin trading. If you are looking to dive into the world of forex trading, it is important to read Forex broker reviews first. Be sure to be well-versed with all the terms as well as the regulations involved with currency trading.

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