The terms “forex” and “FX” are abbreviated forms of the term “foreign exchange” and refer to the worldwide currency exchange market.
Forex trading is not centered around specific physical exchanges, so currency can be traded 24 hours a day, 5 days per week. The forex market is the largest and most fluid trade market in the world, with a daily turnover of more than 5 billion U.S. dollars.
Because the forex market is decentralized, it cannot be controlled by a single institution. While the value of a stock represents the value of a single company, the value of a currency is, at least in part, dictated by the theoretical value of the entire country which issues it. For this reason, currencies are more difficult to valuate than stocks.
Currency trading (popularly called forex trading) is multifaceted and serves many different purposes. For example, a company may use a currency swap to protect its income or expenses from currency fluctuations. Other market participants trade in forex based on pure speculation.
Because exchange rates normally experience only moderate fluctuations, forex traders typically make use of leveraging. The leverage effect can greatly multiply profits, but likewise, it also greatly increases potential losses.
Example:
A euro to Swiss franc exchange rate of EURCHF = 1.0939 means that a trader receives 1.0939 Swiss francs for each euro they sell. If the forex trader exchanges 10,000 euros for Swiss francs at this rate, they receive 10,939 Swiss francs.
If the rate were to drop by 19 pips to EURCHF = 1.0920 over several hours, the trader could exchange their 10,939 francs for 10,017 euros. In this example, the forex trader would make a profit of 17 euros. If, on the other hand, the rate climbed to EURCHF = 1.0956, they would make a loss of around 16 euros.
Today, online brokers make it easy to participate in forex trading, and are growing in popularity.
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