FX 101

Everyday, around 2.1 trillion trading transactions flow in and out of the Foreign Exchange Market (FOREX) making it the biggest financial institution on the planet. Usually the visible human agent in this transaction arena is a currency trader; one who makes a living by buying, holding and selling currencies.

How does a currency trader earn? Usually this trader does not solely rely on Foreign Exchange Market per se. He has one or a number of business ventures. For example, in the banks, they participate in FOREX because they are probably opening an international branch to keep up their operations.

To clearly illustrate this, suppose a US Based Bank A has 400 million dollars. Opening a new branch within the US could be a good idea; however, would cost much. Unlike if Bank A decided to expand in a third world country; wherein the value of a dollar is greater than the local currency. The bank might even venture in other financial services such as loans. Moreover, get more clients from that locality.

However, how much they gain will depend on how much their prized commodity, which is foreign currency, will appreciate or depreciate. Appreciating or depreciating in a foreign exchange market could be attributed to a number of parameters such as the country's GNP, political and economic stability and international relations among other factors.

Maybe, you are wondering where exactly on Earth is the so-called FOREX. Asking ordinary people would probably tell you to go to the Stock Exchange Market such as in New York, Paris or Hong Kong. However, the truth is, there is no tangible venue for the Foreign Exchange Market.

It is like marriage, which is considered by social scientists as an (social) institution; however, does not associate itself with a particular place. One could be married inside a church, inside a courtroom, in the backyard or even in outer space! What makes it as an institution is the presence of people actively playing their roles bound by an agreement whether written, spoken or symbolized. Similarly the Foreign Exchange Market revolves around buyers and sellers which could happen inside a bank, a large multinational company or a government financial department.

As mentioned earlier, trading takes place in any point in the world not just the capital cities such as New York, Seoul, Tokyo and London. This connotes that different from almost all walks of life do engage themselves in this kind of barter relationship. Thus, it will very hard even for governments to set direction for the market.

Why still trade in a Foreign Exchange Market? It is definitely liquid meaning one could readily procure and vend currencies at an offered prize. One also can preset when to start and end a trade to monitor profit or losses. Furthermore, since Foreign Exchange is a worldwide activity it only means that trading never sleeps. Historically, Forex is ideal for larger entities such as corporations and governments because it does not involve money per se but also other things such as investments, imports, exports and other projects whether physical infrastructures or social in nature.