One of the words that are gaining relevance the most in recent years is the term Forex which refers to one of the major investment markets. Its popularity is not a coincidence, rather it is a justified recognition of everything it offers.
That is why here we will tell you everything you need to know about Forex, what it is, what are the assets with which it trades, how to invest in them and more. In this way you can make the most of everything this market has for you.
✨What is Forex? ✨
Known for being the acronym for Foreign Exchange, Forex is the Spanish translation of currency trading or trading. In short, it is a market focused on the commercialization of currencies or currencies, as if it were the stock market, but focused on the management of these assets.
We must remember that each country, or block of countries, has its own currency. For example, the United States operates with the dollar, China with the Yuan, Mexico with the peso, Europe with the Euro, the United Kingdom with the pound. This makes the Forex market huge.
The main characteristics of Forex are:
- It is not centralized: There is no central exchange or body in charge of trading Forex, rather it is a global market. This is a great advantage as the possibility of investing in a large amount of currencies without so much red tape.
- Operations network: To operate, the Forex uses a network of institutions made up of banks, brokers, investors, companies, funds, financial institutions and more. All this makes operations possible 24 hours a day, 7 days a week, unlike exchanges which have hours of operation.
- Most liquid market: Active since the 70s, the Forex market was born with the aim of facilitating international trade through currency exchange. Today, due to its size and number of operations, it is the most liquid market in the world.
- Ease and profitability: Finally, you should know that the currency market is one of the easiest to invest. This is thanks to the fact that the mechanisms are very accessible and nowadays they are available to everyone. In addition, if you make investments properly, the profitability can be high.
✨How does Forex work? ✨
Like other markets, the Forex operates through speculation, that is, trying to estimate the future value of the currency. The traders can buy or sell the currencies anticipating their value, which can be bullish (higher value) or bearish (lower value).
Currencies always trade in so-called pairs, that is, in a set of two currencies: EUR / USD, GBP / EUR, etc. When you trade a pair, say EUR / USD, you are buying the base currency (left) and selling the quote currency (right). This applies to any type of currency regardless of the country.
As with other markets, you should know that in the Forex there are exclusive words for certain concepts. To operate in this market you must take them into account, that is why here we will tell you more about 4 keywords: Spread, Pips, Bid and Ask.
- bid: Bid is the name that indicates the maximum amount that investors or buyers would pay for a currency. For example, the Bid would be the maximum that buyers are willing to pay for a EUR / USD pair, so it would act as a cap to control the price.
- Ask: On the other hand, the Ask is a kind of inverse complement to the Bid. This indicator sets the minimum amount for which Traders would sell a pair. In short, the Ask is the minimum sale price while Bid is the maximum purchase price., which creates a kind of sales floor and ceiling.
- Spread: The term spread refers to the difference between the purchase price and the sale price of a currency pair. For example, if the EUR / USD pair is at 10 to buy and 12 to sell, the spread would be 2 of difference.
- PIP: Defined as the Point Of Percentage, this indicator refers to the minimum possible change between the price of a currency pair. The PIP is used to measure the Spread Therefore, if we have a Spread of 2, as in the previous point, it would be equivalent to a PIP of 2.
✨ Market volatility✨
The volatility of the Forex market is determined by multiple factors. From the liquidity of the market, the interest rate, exchange rate, economic events and even politics can affect the final value of currencies and transactions.
✨Pros of investing✨
Finally, we recommend that you know the advantages of investing in Forex.
- Decentralized market: By not depending on a central institution, the market Forex offers greater freedom of operations. Any user can easily access currency trading which makes this market more open.
- High liquidity: If what you are looking for is liquidity in your investments, Forex is a good option, since its nature allows you to move large amounts of investments. This translates into an injection of liquidity into the market, which helps both reduce risks and spreads.
- A large number of assets: Here we find one of the largest asset catalogs for investment. And, by having a large number of currencies to operate, we can find all kinds of currency pairs, from pairs with currencies from strong countries to pairs with smaller currencies.
- Hours: Finally, you should know that the Forex market offers the advantage of not having limitations such as hours of operation. Unlike the stock market, the world of Forex operates 24 hours a day, 7 days a week so you can invest whenever you want.
Financial analyst and economist with a master's degree in finance.