The Risks of Forex Investing
The Forex or foreign exchange market is a world wide market for trading currencies. Traditionally, it enabled business to trade and invest in businesses in other parts of the world. In a typical business deal in the foregin exchange market, a business may purchase goods by using another currency. For example, a business in the United States could purchase items from Germany using German currency instead of the dollar.
In the 1970's the current forex trade market emerged as countries began to change their policies and exchange rates became less rigid than in the past. The forex market now helps to determine the values of different types of currencies around the world. Trading is conducted 24 hours a day except for weekends. Investors can make and lose quite a bit of money speculating about market trends.
The Forex market is different than other financial markets because of the huge volume of transactions and the fact that transactions occur worldwide. The Bank For International Settlements claims that in April 2010 alone, the daily trading amount in the Forex market was about $3.98 trillion. Oarund $43 billion of that was in currency exchanges alone. The Bank also claims that some businesses that specialize in Forex trading can trade over $4 trillion a day in United States currency.
London is the most active Forex trading market according to statistics. Trading in London accounts for almost 37% of the total trading done in the market. New York City in the United States accounts for about 18% of the market trading and Tokyo, Japan accounts for about 6% of the Forex market trading.
The top five currency traders are Deutsche Bank, UBS AG, Barclays Capital, Citi Bank in the United States, and the Royal Bank of Scotland.
A great number of investors have unrealistic expectations about the potential for profit when they invest in the Forex market. The truth is that along with the potential to earn a great amount of money comes a great amount of risk. Even traders with years of experience can incur large losses in this market.
Losses and gains can be affected by such factors as politics, economic factors in certain countries, and in market psychology. Local and regional factors within a country as well as current events can all have a large impact on the market. For example, any political instability in a country can affect a nation's economy and decrease the value of their curency. The events in one country may also affect other countries in the region as well as their currencies. Just as instability can affect currcency, a stable government can also have a positive affect on the currency of a country.
A large majority of Forex transactions are due to currency speculations. An investor may buy or sell currency simply because they speculate that the currency may lose or gain value. These transactions, known as hedge fund transactions, have become more common since the 1990's. Investment firms may also engage in speculative transactions. Some of these firms have specialists that just deal in these types of transactions. In theory, an investor using such a firm can decrease or limit their Forex trading risks.