Part 3 - An introduction to
forexForex is the
nickname for the Foreign Exchange Market. In the United
States, there are several branches of the stock market, each
with their own name. For instance, some stocks trade on
the Dow Jones, others on Nasdaq. Of course, all stock
market transactions in the United States take place on the New
York Stock Exchange (NYSE). In other countries the same
is true. There may be one or more distinct
markets.
However,
international trade takes place on the market termed the
Foreign Exchange Market, or Forex. Several countries
across the world in almost every time zone participate in trade
on Forex, with multiple currencies being utilized and stocks
and commodities from all participating countries being offered
for trade. Because there are so many nations and time
zones involved, Forex does not function as a “business day”
entity like most domestic stock markets. It remains open
for trade 24 hours a day, 5 days a week.
Of course, these
additional hours increase the risk factor intensely for those
of us who are human and obviously cannot monitor our
investments 24 hours a day. This means that the value of
your holdings could potentially plummet overnight, while you
sleep, because other countries are still trading while you are
in a dream world. Again, it is like a car – there are
many moving pieces under the hood, and just because you cannot
see them does not mean they are not functioning.
This is one reason
for several safety options, like limit orders, which we will
discuss later. This is also why it is strongly
recommended that your first attempts to make money on the stock
market are not transactions that take place within the Foreign
Exchange Market but on a standard nine-to-five domestic trading
market. In our car analogy, this would be comparable to
having asked someone who has never driven or even changed the
oil in a car to rebuild the engine.
Forex
Functionality
While the
functionality of Forex is the same as a domestic stock
exchange, the commodities and prices are more volatile, and
there are additional factors to take into considerations
besides the typical risks associated with a domestic
market. You will have to contend with not only the value
of your stocks and your currency, but also the foreign
currencies involved in any trades or exchanges on Forex, as
well as the inconsistencies of values of particular goods and
services across international borders. It is like driving
a car with a standard transmission as opposed to an
automatic.
In the next
part we'll be discussing alittle about "Understanding
currency conversion".
Click here to read part
4 - Understanding Currency
Conversion
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