Forex Investment Product

The foreign exchange market, also known as forex or FX, is where financial institutions facilitate the buying and selling of foreign currencies. It is referred to as the closest market to the perfect competition, notwithstanding the market manipulation by central banks. The forex market is known to be a volatile and liquid market with a strong trend and high leverage up to 500. In 2019, the global forex market turnover was estimated over Kr6 Trillion per day.

Forex transactions are generally transacted OTC (over the counter). This means that these transactions are directly exchanged between two parties and not on a stock exchange. Trading times generally start on Sunday at 10:00 PM (UTC) and only end on the following Friday, also at 10:00 PM. Forex transactions can therefore take place at almost every time of day and night.

Currencies are essentially always traded in pairs. The first currency in a pair is referred to as the base currency and the second is the quote currency. The type of transaction (buy/sell) always relates to the base currency.

From a technical perspective, this always involves 2 opposing transactions.

For example, if a buy is transacted for the EURUSD currency pair at a price of 1.12509, this involves buying the EUR and simultaneously selling the USD.

The term pip is often also used in this respect. Pip (percentage in point) is a unit in exchange trading in which the price change of a currency pair is indicated. As a rule, a pip is the smallest possible price change of the 5th digit of the presented price.

For example, this corresponds to a price change from 1.12010 to 1.12020 for the EURUSD currency pair and, for the EURJPY currency pair, a price change from 114.010 to 114.020.

Another important criterion in currency trading is the size of the position. The term lot is often also used in this respect. A lot is the standard volume in foreign exchange trading and consists of 100,000 units of the base currency.

For example, trading 1 lot in the EURUSD currency pair corresponds to a position size of EUR 100,000.00.

However, smaller positions can generally also be traded, e.g. 0.01 lot.

For example, if a position of €1,000.00 is traded in the EURUSD currency pair, 0.01 must be made for the position size.

Banks

Banks are the biggest participants in the foreign exchange market and account for almost 2/3 of all foreign exchange transactions. These banks earn profits by catering both the majority of commercial currency exchange and large amounts of speculative trading every day.

Multi-National Companies

Multi-national Companies with global branches, under the foreign exchange market, require foreign currencies in their course of doing business or making investments elsewhere.

Central Banks

Central Banks play an important role in the foreign exchange markets. They regulate the money supply, inflation, and/or interest rates, and often intervene officially or unofficially to control their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a float currency regime.

Hedge Funds

Hedge Funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and they can also borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic outlooks are in favor.

Investment Management Firms

Investment Management Firms typically manage large accounts on behalf of customers and use the foreign exchange market to facilitate transactions in foreign securities.

Forex Broker

Forex Brokers act as intermediaries between banks by providing information on how dealers can get the best prices in the foreign exchange market.