Forex
Since there is no global currency in use, there is a need for a stock market equivalent for trading of foreign currencies. Forex, otherwise known as the foreign exchange market or FX, is used to trade currencies. Major currencies being traded include the United States dollar USD, Euro EUR (€), Japanese yen JPY (¥), Pound sterling GBP (£), Swiss franc CHF (Fr), Australian dollar AUD ($), Canadian dollar CAD ($) and the Swedish krona SEK (kr).
Key participants in the forex market include banks, commercial companies (usually with a global presence), Central banks, hedge funds and Money Transfer/ Remittance companies - where each of these participants has an agenda of their own. For example, commercial companies trade global currencies to hedge their profits against exchange rates fluctuations, while hedge funds simply operate in Forex for profit. Collectively. financial power of these participants dwarfs that of a retail investor, which is why only sophisticated investors participate in forex trading.
Internal, regional, and international political conditions and events can have a profound effect on currency markets. For example, the political instability in Thailand means that less people are willing to trade in Thailand, reducing long term demand for the Thai Baht. This means that in the long run, the Thai Baht may depreciate further against major currencies. In forex, this translates into a simple supply-demand curve. Less demand for the Thai Baht means a certain depreciation in Baht value globally.
Forex trading is deemed to be risky. Due to the small margin in profit (as currency do not fluctuates as much as shares), investors will often buy/sell in Hugh quantities to ensure a reasonable return in absolute profits. The large exposure in trade poses a risk to such investors, as any unexpected global events can spark a significant loss/gain to the investor.
