What is the Foreign Exchange Market? Why Should You Care?
The Foreign Exchange Market (Forex or FX) is the market where one currency is traded for another. Instead of trading stocks or indices, people on the Forex Market would trade currencies. The Foreign Exchange Market (Forex Market) typically opens at 5:00 PM (17:00) EST on Sunday and closes at 5:00 PM (17:00) EST on Friday.
Why do people trade or exchange currencies?
- Currency hedging: Global companies often hold or trade multiple currencies to protect themselves from fluctuations in the market.
- Travel: Travelers crossing national borders will need to exchange currencies to be able to make purchases in another country. Often times, these travelers will pay a large markup to receive the physical currency in person.
- Profit: Traders will make speculative currency trades with the expectation of making a profit. Profits can be generated by earning interest on the currency pair held or positive movement in the direction that the trader expects the currency pair to go.
Why should individuals and businesses invest in the Foreign Exchange Market?
The decision to trade on the Foreign Exchange Market is of a personal nature. If you are looking to get rich quick, this is not the place for you and neither would any market for that matter. Nowhere will you find a way to become wealthy in a fast fashion so please dismiss those pipe dreams. However, trading in the Foreign Exchange Market can lead to far larger positive returns on investment compared to other markets and serve as a healthy part of your portfolio. Considering the leveraged environment that the Foreign Exchange Market affords, you should consider allotting no more than 10% of your investment resources into Forex.
There are plenty of good investment options out there. Stocks, bonds, mutual funds, gold/silver, your own business, and to a lesser extent private equity investments. Putting a small percentage into Forex will provide you with a dynamic addition to your portfolio that enables you to address concerns about exchange rates or give you the opportunity to bring in a more volatile return on a smaller scale compared to other investment options.