Forex - what is it? Trading and investing in the Forex market
Forex is just one of several names for the international foreign exchange market (the terms Foreign Exchange Market or FX Market are also used). Simply put, FOREX is a market where one currency is exchanged for another at a fixed price. It is the largest and most liquid market in the world, with a daily turnover of more than $ 5 trillion. The main traders on the Forex market are banks and other large financial institutions, but in principle, each of us can be an indirect trader, e.g. when making a transaction to buy the currency of a country to which we are going on vacation. Originally, the main function of the Forex market was to facilitate the currency exchange process for the needs of international trading in commodities, goods or services, but its very high volatility and liquidity made it an extremely attractive place for investment and speculation by traders from around the world. Therefore, about 90% of the transactions on the Forex market are now speculative.
As we mentioned earlier, approximately 90% of the forex trading is speculative. There are several ways to invest in the forex market, the most obvious of which is simply to buy it physically - if we believe that the price of a currency will be higher in the future, we can buy it in the form of notes or coins and sell it at a profit in the event that the price actually increases. . Of course, the physical purchase of currencies is not the most convenient and effective solution, which is why, among others, along with the development of financial markets, derivative instruments have been created - financial instruments whose value depends on the value of the underlying instruments, which may be, for example, the exchange rate, raw material or stock exchange index. Derivatives can have various functions, one of which is speculation and the ability to profit from the volatility of the price of the underlying asset (such as gold) without having to physically buy it and the associated storage or transportation costs. The most popular derivative instrument used by individual investors for speculation are contracts for difference, i.e. CFDs (contract for difference). There are many other derivative instruments, including:, futures or forwards, options, IRSs, warrants and currency swaps, but either are not as popular as CFDs or are not available to individual investors.
What are Forex CFDs?
CFDs, or simply Contract For Difference, are financial instruments that are a type of contract between two parties that undertake to exchange an amount whose value is equal to the difference between the opening price and the closing price of the position. CFDs are a type of over-the-counter derivative instruments. Over-the-counter because the transactions are made directly between the parties and the derivatives because their price depends on the prices of the underlying asset. The underlying asset can be: currencies, stocks, indices, commodities, more and more popular cryptocurrencies and many more. It is worth emphasizing - when buying a contract for the increase of e.g. EUR / USD or gold, we do not actually purchase currency or precious metal and we do not become their owner.
Contracts for currencies (forex) are one of the most frequently used individual financial instruments by investors for a reason. This popularity is due to a set of specific features of currency CFD trading:
Trading hours - it is said that the Forex market does not sleep because trading on it is possible 24 hours a day, from Monday to Friday!
Easy availability - usually investments are associated with a large expenditure of funds (the so-called high entry threshold), while to start your adventure with the Forex market, you only need a few hundred zlotys, dollars or euros, no minimum deposit is needed. Easier accessibility obviously does not mean that it is an easier market, on the contrary - investors often start struggling with the market “on the go”, without the necessary education and appropriate preparation.
Leverage - Forex CFDs (like most derivatives) have a built-in leverage. This means that when you open a position, you only need a percentage of the full investment value. For example, an investment in EUR / USD worth 10,000 euros requires a security deposit of 333 euros. More information on leverage can be found here.
Low trading costs - with most Forex brokers, opening and maintaining an account is free, and commissions for buying and selling CFDs are counted in thousandths of a percent. The cost of opening an order in the forex market may be, depending on the type of account, a spread or a spread and commission.
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