What is Forex?
Forex is nothing else but the greatest monetary (or financial) market in the world. However, to understand how Forex operates, you need to deal with the peculiarities of the functioning of the currency markets in general. Financial markets are specialized systems where all participants have an opportunity to trade various financial instruments. The world system includes a huge number of participants: exchangers, broker companies, and various financial institutions (banks, funds, insurance companies). An important role is played by the private traders, whose number is growing every year.
Despite the fact that raw materials and goods can be traded in financial markets, money and securities are often treated as an individual main product. In Forex, currency is the main commodity and, accordingly, all transactions are related to money units. Given this specificity, the term “Forex” is often used to refer to currency exchange operations. It is possible to call Forex any operations with foreign currency in the market, but this value is mainly used in English speaking environment.
Features of the Forex market
The Forex market got its name from the phrase FOReign EXchange (from the English — exchange of foreign currency). As already stated, and in accordance with the translation, Forex is an interbank financial market where operations are performed on the exchange of currency of one country in the monetary unit of another country.
Covering the entire world, the market works in 24/5 mode, that is round the clock from Monday to Friday. For the most part, this fact affected the Forex authority among brokers and traders. It distinguishes Forex from the numerous stock exchanges, where trading occurs exclusively during the working day. Nowadays, Forex is a leader among financial markets by the volume of the transactions. Official data shows that average daily turnover in Forex is over 4 trillion dollars and is expected to grow to $10 trillion by 2020.
Due to this volume, the Forex market has the highest liquidity, which ensures the ability to exchange almost any amount of currency at any point in time.
Specifics of trading
A very important feature of Forex market is that it accepts a certain amount of transactions in lots. A standard contract (lot) is 100 thousand units of purchased currency. However, this practice is used very rarely — most of traded contracts are in ten or more lots by volume.
It should be noted that the volumes above are not always accessible to individual traders, and to achieve their goals they have to contact the brokerage company. The essence of this cooperation lies in the fact that the broker may provide the client with leverage. How is it done? A trader opens a real trading account in the company (it can be also a demo account) and brings a certain amount of money is deposited. Money serves as a guarantee of a client's solvency. Thus, a broker provides a loan, which is called market leverage in Forex.
When transaction is opened by a client, the company freezes the part of a trader’s funds for securing a contract (takes margin). At the same time, the brokerage company adds funds to the account of the client, thereby increasing the power in 100, 200 or 300 times, depending on the trader’s strategy. In this case, leverage can be 1:100, 1:200 or 1:300 respectively. This technique allows a trader to deposit a small amount and convert it into a big opportunity. When using, for example, the credit leverage 1:100, a deposit of $10,000 will allow a trader to claim a transaction with an amount of $1,000000.
In addition to the leverage, many brokers allow their clients to trade with a minimum deposit of $10 on cent accounts. $10 on cent accounts means 1,000 units. By using leverage, a trader can make a transaction with a volume of 100,000 (1 lot).