January 18, 2008, Newsletter Issue #37: Forex Basics

Tip of the Week

Forex allows for foreign products, services and investments to occur on a multi-national level. This means that corporations, governments, and individuals can purchase currency for one nation using currency from another. For example, going on vacation in Mexico and trading dollars for pesos is a small over the counter foreign currency exchange at a bank or other instutituion. This is the foundation of the forex market -- to allow multinational trade of monetary units. Because each nation essentially has a different amount attached to its monetary unit, and this value changes again when compared to another nation’s monetary unit, value can be gained or lost depending on the forex market.

The forex market is a vast global network of multiple players, both on individual and corporate levels. However, there is not a central organization (like the NY Stock Exchange). Instead, there are multiple organizations, many of which are located in New York, Tokyo and London. These institutions handle the largest transactions and function like a currency exchange window at a local bank. A person gives money in one monetary unit and removes money in another monetary unit. The value of the money indicates the value of the trade, similar to trading stocks and bonds. The forex market trades trillions of dollars almost daily. It surpasses the stock market of any single nations, and may even surpass the value of all stock markets combined. This is because the trades are simplified. They are simplified because there is no insider trade information, unlike the stock market. No company can single-handedly destroy or enhance the value of the dollar or yen or British pound in the forex market. Instead these values are dictated by the foreign currency trade and that is predicted by the forex fundamental analysis, which uses national economy indicators.

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Thank you for your interest and good luck!
Forex Club, New York