What Is Forex?
If you have ever read any journal or newspaper that is related to the stock market, you will probably have seen the words “forex,” “FX,” and “foreign exchange market” pop up often (they all mean the same thing, by the way). Let’s briefly explain these terms.
Imagine an exchange that is taking place between two currencies. You decide to exchange your Canadian dollars in return for U.S. dollars. Whenever that process happens, you have participated in the foreign exchange market.
What you probably don’t realize is that in the foreign exchange markets earned income is made due to the constant changes that occur in these exchange rates. Given that it is one of the largest financial markets in the world at $5 trillion being traded on a daily basis, people are looking to trade in the forex market as a way of making an investment.
In the same way that each company has a stock that indicates how well the company is doing over time, countries have their own
stock in the form of currency pairs. This is why you will see everything expressed in pairs whenever you read anything pertaining to the forex market.
The value of the currency is seen as a direct reflection on how the market views the present and future economic well-being of the country. The catch to this is that you can only determine the value of a country’s currency relative to another currency. Say that you had EUR/USD, a common pair in the forex market. If this number goes up from 1.2500 to 1.2505, the value of the European dollar has increased relative to the U.S. dollar. This could be due to factors that improved the outlook on Europe’s economy, deteriorated the outlook on the American economy, or both factors at the same time. Traders need to keep a very sharp eye on the news to see how the market is perceiving the value of a given currency pair.
Much like stock traders who make their money by selling the company shares back into the market place, forex traders make money by selling currencies back to the forex market.
Did this basic overview of Forex clear any confusions you had? Let us know in the comments below!
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