More and more people are becoming interesting in investing in Forex trading but many are still in the dark as to what Forex trading really is and how it works. Below is a short article clearly outlining the basics for you..
The Foreign Exchange market (or Forex/FX) trades in different currencies. It lets banks and other institutions easily buy and sell currencies. The purpose of the Foreign Exchange market is to help international trade and investment. A foreign exchange market helps businesses to convert one currency to another. For example, it allows a U.S. business to import European goods and still pay Euros, even though the business's income is in U.S dollars. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency.
It is primarily an over the counter market with trades between large commercial banks. There are four types of people involved in the foreign exchange market: banks, brokers, customers and central banks.
Banks - These are the biggest participants. They can profit by buying and selling currencies to and from each other. Roughly two-thirds of all FX transactions involve banks dealing directly with each other.
Brokers - These act as intermediaries between banks. Dealers contact them to find out where they can get the best price for currencies. These arrangements are beneficial because they afford anonymity to the buyer or seller. Brokers can profit by charging a commission on the transaction they arrange.
Customers - Large companies usually require foreign currency during the course of doing business or making investment. Other types of customers are individuals who buy foreign exchange to travel abroad.
Central Banks - These sometimes paricipate in the FX market to influence the value of their country's currencies.
With more than $1.2 trillion changing hands everyday the activity of these participants affects the value of every dollar, pound, yen or euro.
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