WHAT IS FOREX
Forex or FX for short is a Foreign eXchange/currency market. To be more specific it is a decentralized over-the-counter financial market that has little over sight and is subject to manipulation. This market is essentially open 24 hours a day, 7 days a week as currency exchanges happen every second all around the world. Maybe your friend exchanged US Dollars to EURO’s at the airport in Paris or converted British Pounds to Japanese Yen online through paypal to buy the most recent Anime. The possibilities are endless and as a result, trading/exchange volume will continue to increase.
Banks
The largest participates in the foreign exchange market are Banks. Customers normally go their bank to convert money before making a purchase ( transaction). Banks are interested in making a profit between the currency conversion, therefore the bank can and will hold large amounts of currencies for longer periods of time than most participants as you and I only need to convert one currency to another in order to spend it ( to purchase).
The banks interest (strategy) is to Hold a currency, collect transactions ( build reserves), and convert their currency reserves into another currency with a participate ( a bank) all at once or make several smaller transactions through out a short period of time at better rate than what they collected the reserves at. Confusing?
Part One: The Collecting of Reserves. You and I need to convert our currency into another currency to buy a product or pay for a service. We go to our bank and exchange our currency and the bank gives us another currency. The bank collects currency reserves through this process.
Part Two: Selling of Currency Reserves. Over the last year, your local bank has collected a large amount of one currency and now the bank needs to Sell(convert) this large amount of reserves to replenish their stock pile of another currency.
Just like how you needed to convert a currency into another to pay for a service or product, a bank also needs to the same to continue their business. The difference between you and your bank is that you need to convert the money immediately at the current over the counter exchange rate, while the bank has plenty of time to exchange their reserves. As a result, the banks are able to plan accordingly and make a profit from collecting currency reserves at one/several prices and exchanging ( making a deal) it with another bank or participate at another price.
What’s Next?
Forex Brokers – Online forex brokers allow us to convert our money into another currency real time at the most recent exchange price without using a bank as an intermediary.
Leverage – Online Forex Brokers allow us to make exchanges real time with leverage. 50:1 Leverage allows us to complete a currency transaction 50 times larger than the amount of money we actually have in our brokerage account. This means that when we exchange $1000 USD to another currency, our transaction size is actually $50,000. As result, when we Buy and Sell ( complete transactions) we can exchange currencies at better prices than what we purchased them for and make a profit just like the banks.
