By Arjun Chandrasekar.
You might have heard the term “forex trading” in the news, but you probably don’t quite understand what it means. Well, we’re here to help you! In short, forex (foregin exchange) is a method of exchanging currencies. The foregin exchange market is an international exchange of currencies for a multitude of reasons, including commerce, tourism, and trade. Due to expanded global markets, forex trading is known to be one of the biggest, most liquid markets.
In terms of the history of forex trading, we can start as early as the Babalonian Ages, where humans traded accessories such as gold and silver for livestock or household goods. As time passed into the early 1900s, the real forex market as we know it began. We can think of “modern day” forex trading to have begun during the early 1970s in the US, when many currencies were allowed to be freely floated and traded.
The entire point of the forex market is to stabilize currencies and provide a reliable, trustworthy place to exchange these currencies. Almost all currencies introduced to the forex market, such as the US Dollar, Euro, Yen, and Pesos, were required to meet this standard to avoid destabilization and improper fluctuation. However, investing in these currencies is hard for the day-to-day investor due to the sheer amount of capital it requires, so the majority of investors in the forex market are large, international banks and hedge funds.
Although the forex market isn’t directly controlled by any organization, like how the New York Stock Exchange (NYSE) is controlled by the Securities and Exchange Commission (SEC), there are a few institutional banks which can influence the market’s status, including JP Morgan, Citi, and UBS. Also, unlike many other stock exchanges, the forex market doesn’t have a central brick-and-mortar marketplace; all transactions are electronically over-the-counter (OTC). So we can essentially think of the forex market as an internationally interconnected system of currency transactions.
Along with trading currencies, the forex market offers a wide variety of exchanges such as options contracts, derivatives, futures, etc. Like the normal stock market, interested investors are looking to diversify their portfolios through exploring these exchanges, while, of course, trying to make a profit. Some investors even look to hedge or offset against international currencies; for example, a US-based investor might offset the Euro or the Yen.
So just to recap, the FX (Forex) market is a common place to trade all types of currencies. The modern Forex market began in the 1970s, and has continued to evolve since. By offering various currencies to exchange, along with different ways to trade these currencies, it is now one of the most liquid, and one of the most popular, markets in the world.
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