The foreign exchange market is one of the most exhilarating global markets. Until the early 21st century, currency market had been an exclusive playground for gigantic financial institutions, hedge funds and affluent individuals. However, the emergence of the internet leveled the playing field, and now investors can buy and sell currencies effortlessly with a click of the mouse through numerous online forex brokers.
Most people are familiar with some form of currency exchange. For example, if a company or an individual in the UK wants to buy wine from Spain, the wine must be paid in euros (EUR) since Spain is part of the European single currency. This means that the importer in the UK would have to exchange the equivalent value of sterling (GBP) into euros. The same goes for traveling: A Japanese tourist in Sweden can’t pay in yen (JPY) to buy IKEA furniture because the yen is not a locally accepted currency. Therefore the tourist has to exchange the yens for the local currency, in this case the Swedish krona (SEK).
Indeed, the need to exchange currencies is the main reason why the forex market is the largest, most liquid financial market in the world. It trumps other markets in size, with a traded value of approximately $5,000 billion per day.
The foreign exchange market is relatively stable and void of massive fluctuations because most currency pairs move less than 1% per day. Therefore countless currency traders depend on the availability of high leverage – which can be up to 400:1 – to make the most of movements in the market.
A greater leverage can be tremendously risky, but because of continuous trading and high liquidity, most brokers have made high leverage an industry threshold because leveraging increases the likelihood of higher returns. The internet allows traders to compare forex brokers and choose the broker that is best for them.
The forex market provides a plethora of opportunities for investors, but the trader must understand the basic mechanics behind currency movements.