We’ve taken our first step into the foreign exchange market by looking at what FOREX is all about. Today, we shall take a step forward into the risk and profitability involved in the foreign exchange market.
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The foreign exchange market, also known as the FOREX market, facilitates the buying and selling of currencies around the world. Unlike stocks, the end goal of FOREX trading is to yield a net profit by buying low and selling high. It’s that simple.
FOREX traders have the advantage of choosing a handful of currencies over stock traders who must parse thousands of companies and sectors. In terms of trading volume, the FOREX market is the largest in the world. Due to the high trading volume, FOREX assets are classified as highly liquid assets.
Suggested Read: Everything You Need to Know About the FOREX Market: Day 1 of 10
The majority of foreign exchange trades consist of spot transactions, forwards, foreign exchange swaps, currency swaps, and options. However, as a leveraged product, there is plenty of risks associated with FOREX trades that can result in substantial losses. Let’s take a break and look at what “Leverage” is.
What is Leverage?
Leverage results from using borrowed capital as a funding source when investing to expand the firm’s asset base and generate returns on risk capital. It’s an investment strategy of using borrowed money, specifically, the use of various financial instruments or borrowed capital.
Traders and investors use leverage to multiply their buying power in the market.
Leverage and Risk in the FOREX market
In FOREX trading, leverage requires a small initial investment–a margin–to gain access to substantial trades in foreign currencies. Small price fluctuations can result in margin calls where the investor is required to pay an additional margin. During volatile market conditions, aggressive use of leverage will result in substantial losses in excess of initial investments.
Just like every other business in the financial world, FOREX is a very profitable venture. It will be surprising to know it is the only market in the world that operates 24/5, from Monday through Friday, using different time zones.
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