The forex market is the world's largest financial market, which plays a vital role in the global economy. Every day trillions of dollars are exchanged from one currency to another. Currency exchange is essential for international businesses and the participants include governments, businesses, and of course investors. Governments use the forex markets to implement policies. Businesses can participate in the forex market to facilitate international trade and to convert payments for goods and services bought overseas. Advanced investors use the forex market to speculate on changes in currency prices, which almost change constantly during the week. The forex market is open 24 hours a day, excluding the weekends.
Investors profit when they buy a currency and its price increases. Investors can also sell or short a currency in anticipation of a price decrease. Currencies trade in pairs, which means the value of one currency is always stated relative to another currency. Let's suppose that an investor thinks europeean economy is going to grow faster than United States. As a result the investors think that the euro will strengthen against the US dollar and then buy the EUR/USD pair. The investor could make money if the pair rises and lose money if the pair falls. Margin is used for buying and selling currency pairs. However, it is much different compared to buying and selling stocks.
Margin is the borrowed money used to purchase securities in a margin account. The amount of margin you will need varies between currency pairs and the size of a trade. Currency pairs typically traded in specific quantities known as lots. There are several different lot sizes, but the two most common are standard and mini. It is important to understand that these lot sizes are highly leveraged. Leverage is using a small amount of money to control a very large amount of currency. Leverage is the key feature of this market. If investors manage risk and limit leverage, then they can possibly capture the benefits of forex investing.
For example, if the US dollar experiences a downtrend, it then impacts commodities, because they are typically priced in US dollars. This in turn raises the cost of goods and is inflationary. As a result, the interest rates may rise causing bond prices to fall. All of this can impact the stock market. The forex market's widespread influence may appeal to investors who are interested in global economics. Investors who are less interested in learning about connections between various global market might consider a less risky method of forex investing such as currency exchange traded funds or ETFs.