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The Forex Market.
In order to gain a complete understanding of what foreign exchange (forex) is, it is useful to examine the reasons
that lead to its existence in the first place. Exhaustively detailing the historical events that shaped the forex
market into what it is today is of no great importance to the forex trader and therefore we happily will omit
lengthy explanations of historical events such as the Bretton Woods accord in favor of a more specific insight
into the reasoning behind foreign exchange as a medium of exchange of goods and services. Originally our ancestors
conducted trading of goods against other goods this system of bartering was of course quite inefficient and required
lengthy negotiation and searching to be able to strike a deal. Eventually forms of metal like bronze, silver and
gold came to be used in standardized sizes and later grades (purity) to facilitate the exchange of merchandise.
The basis for these mediums of exchange was acceptance by the general public and practical variables like durability
and storage. Eventually during the late middle ages, a variety of paper IOU started gaining popularity as an exchange
medium.
The obvious advantage of carrying around 'precious' paper versus carrying around bags of precious metal was slowly
recognized through the ages. Eventually stable governments adopted paper currency and backed the value of the paper
with gold reserves. This came to be known as the gold standard. The Bretton Woods accord in July 1944 fixed the
dollar to 35 USD per ounce and other currencies to the dollar. In 1971, president Nixon suspended the convertibility
to gold and let the US dollar 'float' against other currencies.
Since then the forex market has developed into the largest market in the world with a total daily turnover of
about 1.5 trillion USD. Traditionally an institutional (inter-bank) market, the popularity of online currency
trading offered to the private individual is democratising forex and widening the retail market.
In the last years, the forex market has expanded from one where banks would execute transactions between
themselves to one in which many other kinds of financial institutions like brokers and market-makers participate
including non-financial corporations, investment firms, pension funds and hedge funds. Its' focus has broadened
from servicing importers and exporters to handling the vast amounts of overseas investment and other capital
flows that currently take place. Lately forex day trading has become increasingly popular and various firms
offer trading facilities to the small forex investor.
Forex is an 'over the counter' (OTC) market, that means that there is no central exchange and clearing house
where orders are matched. Geographic trading 'centers' exist around the world however and are: (in order of
importance) London, New York, Tokyo, Singapore, Frankfurt, Geneva & Zurich, Paris and Hong Kong. Essentially
forex deals are made between participants on the basis of trust and reputation to deliver on an agreement.
In the case of banks trading with one another, they do so solely on that basis. In the retail market, customers
demand a written legally accepted contract between themselves and their broker in exchange of a deposit of funds
on which basis the customer may trade.
Some market participants may be involved in the 'goods' market, conducting international transactions for the
purchase or sale of merchandise. Some may be engaged in 'direct investment' in plant and equipment, or may be
in the 'money market,' trading short-term debt instruments internationally. The various investors, hedgers, and
speculators may be focused on any time period, from a few minutes to several years. But, whether official or
private, and whether their motive be investing, hedging, speculating, arbitraging, paying for imports, or seeking
to influence the rate, they are all part of the aggregate demand for and supply of the currencies involved, and
they all play a role in determining the exchange rate at that moment.
In comparison the over the counter market is traded around the world by a multitude of participants and price
quality, reputation and trading conditions determine who a participant wishes to trade with. The forex market
is probably the most competitive market in the world. In 1998 a survey under the auspices of the Bank for
International Settlements (BIS), global turnover of reporting dealers was estimated at about USD 1.49 trillion
per day. In comparison, currency futures turnover was estimated at USD 12 billion.
Among the various financial centers around the world, the largest amount of forex trading takes place in the
United Kingdom, even though that nation's currency, the British pound is less widely traded in the forex market
than several others.
Article Source:
Info-Forex.com
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