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The Forex Market is a global and decentralized market for buying and selling currencies. Investors, brokers, private banks and central banks are the main participants. Many investors seek a return by taking advantage of volatility in currency prices. The world’s largest market, outperforming stocks and futures markets.
The forex market is made up of a network of agents who exchange currencies. The word “Forex” is derived from the English term “foreign Exchange”. For example, if you have dollars, you can buy euros, yen or other currencies.
The Forex Market for Individual Investors
While those who participate in this market may have several objectives, most investors today do so to obtain a return by taking advantage of the volatility of the market and some characteristics of this market, such as high liquidity, the availability of information, the possibility of leverage and the tools offered by this market.
Although until a few years ago only large financial institutions had access to the forex market, today, thanks to cost reduction and technological advance, the small investor can operate in the forex market with conditions very similar to those of large institutional investors.
Unlike stock markets, where stock transactions are centralized on stock exchanges, forex market operations are not centralized, but occur among many agents, such as banks, brokers, other financial institutions, central banks and individuals.
Volume and Liquidity
The volume handled by this market has been increasing year by year. It is currently about 5.3 trillion per day. This far exceeds the volume handled by the New York Stock Exchange and the equities and futures markets. The following graph shows that the volume handled by the forex market is impressive when compared to the other mentioned markets.
This huge volume means that the liquidity available to investors is extremely high, which makes it very attractive. Orders, regardless of size, are executed moments after they are placed.
Where do you get the prices of currency pairs on the forex market?
A few years ago, the world’s largest banks and financial institutions were connected to an electronic network, where they exchanged the prices at which they were willing to sell and buy currencies. With the growth of the forex market, numerous players participate by offering and demanding currencies. Nowadays, most brokers get the prices of currency crosses from centralized information sources, which provide this information to many agents simultaneously. In this way, brokers ensure that their clients’ orders can be executed at the prices their clients indicated, because the prices from sources (called “feeds”) are obtained from numerous financial institutions. Other brokers have a broad client base, so they offer the best prices at which their clients are willing to buy and sell. To ensure liquidity in the event of non-counterpart orders, these brokers often have agreements with banks.