What is the forex market?
Posted on April 7, 2008
Filed Under forex, markets |
The foreign exchange market, forex for short, is a market which acts very much like the stock market, only what you are investing in is not stocks, it’s currencies. You can’t buy “100 shares of the US Dollar” per se, but you can make bets, one way or hte other, on the underlying value of any currency. Like the stock market, the “blue chip” currencies, such as the US Dollar, Great British Pound, the Euro and the Yen all have signficantly more volume.
Much of the trading does take place between banks, governments, and brokers or institutional investors. Retail or individual investors can also get involved, but they enter with a different purpose. Many of these institutions aren’t speculating, they are doing a business hedge, or some other complicated transaction. Banks make up about half of the volume, and that money is often moved every day or even overnight, and then used the next day in banks, savings accounts and to draw on checks.
Brokers also play a large role. Companies such as Deutsche bank, UBS, Citigroup, and others such as HSBC, Braclays, Merrill Lynch, JP Morgan Chase, and still others such as Goldman Sachs, ABN Amro, Morgan Stanley, and so on are actively trading in the forex markets to increase wealth of stock holders. Some times they are being defensive, and protecting the value of their portfolios, and sometimes they are making big bets, with the hopes to improve their own returns. Sometimes both.
Finally, Central Banks are also involved. They have certain goals about the amount of money in circulation, interest rates, how available money is, and how liquid a currency is. It’s there role in the process not to make money, but instead to control the market — and the world economy, using the markets.
So, the forex market is a place where brokers, banks, institutional and individual investors all can speculate, hedge risk, or make investments for the long term, not on stocks, but on currencies. And the Central Banks try to keep a lid on it all.
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