How Foreign Exchange market become the largest financial market in the world

Foreign Exchange markets originated from the need of converting payments received in foreign currency into one’s home currency.

Today’s natural foreign exchange participants include exporters, importers, investors in a foreign country, as well as funds invested in securities abroad.

All of these are labelled as ‘real money’, or money that is actually exchanged and delivered to make payments in the foreign currency.

Forex Market price changes with Supply and Demand

Exchange of real money creates a natural demand, causing exchange rates to fluctuate by the economics law of supply and demand.

A currency will lose value if there are more sellers while a currency will gain value if there is high demand in the form of many buyers.

With the large flows that real money creates, for which we use the term ‘liquidity’, the foreign exchange market has become one of the biggest markets in the world.

Thanks to its strong foundation, the foreign exchange market is an asset class of its own, suitable to be exploited by short-term speculation.

Speculating = Online Forex Trading

Speculation differs from ‘real money’ in that the exchange of one currency against another is not done in order to settle any obligation in the foreign currency, but with the sole purpose of cashing in on the relative value-change of one currency against another.

With currency markets in constant oscillation and because any currency can be bought or sold against any other currency at any time, a currency speculator benefits from endless trading opportunities.

Volumes traded by speculators far outgrow volumes of ‘real money’ exchange in modern markets, and daily turnover is reported by the BIS to be above 6 Trillion USD.

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