By trading on forex you can speculate on the relative values of currencies. Forex trading involves simultaneous purchase of one currency while selling another, the goal is to profit from fluctuations in the exchange rate.
The market is huge, with an average daily turnover of $5.1 trillion, according to the latest market assessment. Forex trading is described as an over-the-counter (OTC) market, which actually means there are no central exchanges or clearing houses. Because of this forex trading is a truly 24/7 market, with prices constantly changing and gapping is less likely to occur. The forex market is also considered to be a principals-only market. This means that, when buying and selling stocks, investors use a broker. Forex trading companies are called dealers and assume risk to make the trade. Rather than charging commission, one of the primary way for brokers to make a profit is using the bid-ask spread.
Forex trading always involves two currencies and some even call it a zero sum game. When one currency rises in value, the currency on the other side of the cross loses value.
The main purpose of the forex market is to enable large multinational companies to exchange one currency for another – for example to purchase raw materials in another country or to repatriate foreign earnings. But this main element takes up only about one-fifth of the market. The rest is speculative, with prices driven by the actions of investors speculating on future movements.