The 24-hour foreign currency exchange market, or Forex, is the largest trading market in the world with over $4 trillion/day in volume.
Just like other investment alternatives, foreign exchange offers traders/investors a market where they can buy or sell an investment product. In this case it is a specific currency pair. The currency pair may be the euro versus the US dollar, the US dollar versus the Japanese yen, the British pound versus the US dollar, the euro versus the British pound, or a number of other currency combinations.
The different currency combinations represent nothing more than the value of one currency versus the value of another. That relationship is represented by a single price. In foreign exchange, the price of a currency pair is the market's expectations (at that time) of the value of that currency measured against another currency given the current and expected economic and political situation in the two economies. In equity terms, it is the price of the stock.
Trading Forex provides several advantages over other financial instruments. These include:
With a daily trading volume that is 50 times larger than the New York Stock Exchange, there are always brokers/dealers willing to buy or sell currencies in the Forex markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price. Because of the lower trade volume, investors in the stock market are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.
50:1 leverage is commonly available from online Forex dealers, which substantially exceeds the common 2:1 margin offered by equity brokers. At 50:1, traders post a $2,000 margin for a $100,000 position, or 2%. Leverage can work against you as well as for you.
Lower Transaction Costs
It is much more cost efficient to trade Forex. Most Forex brokers offer traders access to all relevant market information and trading tools as part of their free services. In contrast, commissions for stock trades range from $7.95$29.95 per trade with online discount brokers up to $100 or more per trade with full-service brokers. Another important point to consider is the width of the bid/ask spread. Regardless of deal size, Forex dealing spreads are normally 5 pips or less (a pip is .0005 US cents). In general, the width of the spread in a forex transaction is less than 1/10 that of a stock transaction, which could include a .125 (1/8) wide spread.
Forex is a true 24-hour market. Whether it's 6 pm or 6 am, somewhere in the world there are always buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately.