What Percent Of The Stock Market Is Owned By Foreigners What Is the Forex (Foreign Exchange) Market?

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What Is the Forex (Foreign Exchange) Market?

The Forex (short for foreign exchange) market or foreign exchange currency market is a world-wide market. It is decentralized and accessible to all: when a tourist in Tokyo buys dollars with yen, they are performing a transaction on the Forex market – just as when a multinational institution converts millions of euros to pounds sterling. This makes it the largest market in the world, rendered volatile by the large volume of transactions. It is also always open, except on weekends.

Many Forex traders only seek to trade a foreign currency against their own, such as companies needing to pay wages somewhere other than where they sell. But a large part of the market consists of currency traders who speculate on movements in exchange rates – in the same manner as those who are speculating on stock prices.

Exchange rates fluctuate due to macroeconomic developments and events and expectations that traders have, in addition to actual cash flows. This market attracts investors because its volatility provides many opportunities for profits (and losses, of course), while allowing the use of hedging instruments as well. A further advantage is that the Forex broker authorizes the use of leverage by allowing that their investors trade on margin.

On the Forex market, currencies are traded against each other by “pairs”, which represent the relative value of a unit of currency, the “base” against another currency. They are usually written by juxtaposing the three-letter codes of international currencies, starting with the base, for example, EUR/USD is the ratio of the Euro against the U.S. dollar.

Like all markets, there is a difference between purchase price and selling price with Forex, called the gap between demand and supply. It is measured in “pips,” the smallest difference in price that a given exchange can offer – and generally equal to one hundredth of a percent. For major currencies, the difference between the price at which one can buy and that at which one can sell is often between one and three pips.

The market is divided into three access levels: at the top is the interbank market, including the largest banks and securities dealers, who generally perceive sharp differences. Smaller banks and large multinational corporations come later, followed by pension funds and asset managers. Traders, who bring up the rear, participate indirectly through brokers or banks, and constitute a growing part of the market through the facilities offered by the Internet.

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