Part 3 - An introduction to Forex

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Forex 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.  

Next time we'll be discussing a little about "Understanding currency conversion".

For more information about this part of Stock Market Trends, please refer to my forex trading guide at the end of the lesson.