Forex: Foreign Currency Market or Foreign Exchange Market
The forex is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies*. It is estimated that 3 to 5 trillion dollars worth of business is transacted every day on the forex**.
The primary purpose of the foreign exchange market is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import European goods and pay Euros, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies***.
Diversification for your Portfolio
One of the keys to successful investing is to diversify your holdings. When diversifying many people simply invest in stocks that are spread through a range of different tolerance levels, and economic sectors, and even put some money in mutual funds. However, this isn't really a diversified portfolio because the positions are still 100% based on stock market fluxuations. A truly diversified account will have stocks, bonds, mutual funds, commodities, perhaps some real estate and most definitely have a position in the forex.
The forex is unique because it offers the trained trader opportunities to realize profits and returns on investment in any economic condition. Even when the NASDAQ, Dow Jones or S&P 500 are plummeting, the forex can produce profitable returns. Poor interest rates on bonds and low commodity prices still do not affect the forex and its potential profitability. In the forex market you can make trades on both upward and downward trends.
As with any investment, there exists the possibility of loss on all or part of your investment.
Sources
*Levinson, Marc. Guide to Financial Markets, Profile Books Ltd, London. 2005. Pg. 14-15
**Triennial Bank Survey: Foreign Exchange and Derivatives Market Activity, Bank for International Settlements, Basel, Switzerland. December 2007. Pg 1. http://www.bis.org/publ/rpfxf07t.pdf.
***Flassbeck, Heiner, and La Marca, Massimiliano. Global Imbalances and Destabilizing Speculation. http://www.igidr.ac.in/~money/mfc_10/Massimiliano_submission_40.pdf.
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