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Investopedia - Free Forex Sites
Forex FX refers to the global electronic marketplace for trading international currencies and currency derivatives. It has no central physical location, www investopedia com forex, yet the forex market is the largest, most liquid market in the world by trading volume, www investopedia com forex, with trillions of dollars changing hands every day, www investopedia com forex.
Most of the trading is done through banks, brokers, and financial institutions. The forex market is open 24 hours a day, five days a week, except for holidays. The forex market is open on many holidays on which stock markets are closed, though the trading volume may be lower.
Its name, forex, is a portmanteau of foreign and exchange. It's often abbreviated as fx. Forex exists so that large amounts of one currency can be exchanged for the equivalent value in another currency at the current market rate. Some of these trades occur because financial institutions, companies, or individuals have a business need to exchange one currency for www investopedia com forex. For example, an American company may trade U.
dollars for Japanese yen in order to pay for merchandise that has been ordered from Japan and is payable in yen. A great deal of forex trade exists to accommodate speculation on the direction of currency values. Traders profit from the price movement of a particular pair of currencies. These represent the U.
dollar USD versus the Canadian dollar CADthe Euro EUR versus the USD, and the USD versus the Japanese Yen JPY. There will also be a price associated with each pair, such as 1. If the price increases to 1. The USD has increased in value the CAD has decreased as it now costs more CAD to buy one USD. In the forex market, currencies trade in lots called micro, mini, and standard lots. A micro lot is 1, units of a given currency, a mini lot is 10, and a standard lot isWhen trading in the electronic forex market, trades take place in blocks of currency, and they can be traded in any volume desired, within the limits allowed by the individual trading account balance.
For example, you can trade seven micro lots 7, or three mini lots 30,or 75 standard lots 7, The forex market is unique for several reasons, the main one being its size. Trading volume is generally very large. This exceeds global equities stocks trading volumes by roughly 25 times. The largest foreign exchange markets are located in major global financial centers including London, www investopedia com forex, New York, Singapore, Tokyo, Frankfurt, Hong Www investopedia com forex, and Sydney.
The forex market is open 24 hours a day, five days a week, in major financial centers across the globe, www investopedia com forex. This means that you can buy or sell currencies at virtually any hour. In the past, forex www investopedia com forex was largely limited to governments, large companies, and hedge funds.
Now, anyone can trade on forex. Many investment firms, banks, and retail brokers allow individuals to open accounts and trade currencies. When trading in the forex market, you're buying or selling the currency of a particular country, relative to another currency.
But there's no physical exchange of money from one party to another as at a foreign exchange kiosk. In the world of electronic markets, traders are usually taking a position in a specific currency with the hope that there will be some upward movement and strength in the currency they're buying or weakness if they're selling so that they can make a profit.
A currency is always traded relative to another currency. If you sell a currency, you are buying another, and if you buy a currency you are selling another. The profit is made on the difference between your transaction prices. A spot market deal is for immediate delivery, which is defined as two business days for most www investopedia com forex pairs. The business day excludes Saturdays, Sundays, www investopedia com forex, and legal holidays in either currency of the traded pair.
During the Christmas and Easter season, some spot trades can take as long as six days to settle. Funds are exchanged on the settlement datenot the transaction date. The U. dollar is the most actively traded currency. The euro is the most actively traded counter currencyfollowed by the Japanese yen, British pound, and Swiss franc.
Market moves are driven by a combination of speculationeconomic strength and growth, and interest rate differentials. Retail traders don't typically want to take delivery of the currencies they buy. They are only interested in profiting on the difference between their transaction prices. Www investopedia com forex of this, most retail brokers will automatically " roll over " their currency positions at 5 p. EST each day. The broker basically resets the positions and provides either a credit or debit for the interest rate differential between the two currencies in the pairs being held.
The trade carries on and the trader doesn't need to deliver or settle the transaction. When the trade is closed the trader realizes a profit or loss based on the original transaction price and the price at which the trade was closed. The rollover credits or debits could either add to this gain or detract from it. Since the forex market is closed on Saturday and Sunday, the interest rate credit or debit from these days is applied on Wednesday. Therefore, holding a position at 5 p.
on Wednesday will result in being credited or debited triple the usual amount. Any forex transaction that settles for a date later than spot is considered a forward, www investopedia com forex. The price is calculated by adjusting the spot rate to account for the difference in interest rates between the two currencies. The amount of adjustment is called "forward points, www investopedia com forex.
The forward points reflect only the interest rate differential between two markets. They are not a forecast of how the spot www investopedia com forex will trade at a date in the future.
A forward is a tailor-made contract. It can be for any amount of money and can settle on any date that's not a weekend or holiday. As in a spot transaction, funds are exchanged on the settlement date.
A forex or currency futures contract is an agreement between two parties to deliver a set amount of currency at a set date, called the expiry, in the future. Futures contracts are traded on an exchange for set values of currency and with set expiry dates. Unlike a forward, the terms of a futures contract are non-negotiable. A profit is made on the difference between the prices the contract was bought and sold at. Instead, speculators buy and sell the contracts prior to expiration, realizing their profits or losses on their transactions, www investopedia com forex.
There are some major differences between the way the forex operates and other markets such as the U. stock market operate. This means investors aren't held to as strict standards or regulations as those in the stock, www investopedia com forex, futures or options markets. There are no clearinghouses and no central bodies that oversee the entire forex market. You can short-sell at any time because in forex you aren't ever actually shorting; if you sell one currency you are buying another.
Since the market is unregulated, fees and commissions vary widely among brokers. Most forex brokers make money by marking up the spread on currency pairs.
Others make money by charging a commission, which fluctuates based on the amount of currency traded. Some brokers use both. There's no cut-off as to when you can and cannot trade. Because the market is open 24 hours a day, you can trade at any time of day.
The exception is weekends, www investopedia com forex when no global financial center is open due to a holiday. The forex market allows for leverage up to in the U. and even higher www investopedia com forex some parts of the world, www investopedia com forex.
Leverage is a double-edged sword; it magnifies both profits and losses. Assume a trader believes that the EUR will appreciate against the USD. Another way of www investopedia com forex of it is that the USD will fall relative to the EUR. Later that day the price has increased to 1. If the price dropped to 1.
Currency prices move constantly, so the trader may decide to hold the position overnight. The broker will rollover the position, resulting in a credit or debit based on the interest rate differential between the Eurozone and www investopedia com forex U.
Therefore, at rollover, the trader should receive a small credit. If the EUR interest rate was lower than the USD rate, the trader would be debited at rollover. Rollover can affect a trading decision, especially if the trade could be held for the long term. Large differences in interest rates can result in significant credits or debits each day, which can greatly enhance or erode profits or increase or reduce losses of the trade.
Most brokers provide leverage. Many U. brokers leverage up to Let's assume our trader uses leverage on this transaction. That shows the power of leverage.
Investing Basics: Forex
, time: 7:20Forex (FX) Definition, Uses, & Examples
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