Despite its growing size and potential, Forex market was a kind of “terra incognita” for retail traders and general public alike. Before the rise of internet trading changed everything, Forex markets around the world were forced to take the back seat, while stocks, options and futures markets reigned supreme. In fact, few trades other than large banks, hedge funds or other major players in financial markets even bothered to venture into this great unknown. In any case, now that the genie is no longer in the bottle, it might be a good idea to analyze some major differences between Forex and other markets.
Comparison: Other Markets vs. Forex Markets
In comparison: in Forex markets, traders do not deal with securities, commodities or goods; they trade money for money, one currency for another. Even the exchange is not physical – it never has been, as everything is done via computers. The market is entirely speculative, whereas in other markets, speculation is a much smaller part of the equation. One of the initial driving forces behind Forex markets from the very beginning has been a practical one: the need of international financial players (like major banks, corporations and such) to constantly exchange currencies to meet their daily needs: issuing loans, paying salaries, acquiring raw materials, supplies and goods etc. In order to do that in a foreign country, you need a steady source of fresh currency readily available, and Forex came to the rescue. The idea of turning a profit from these ventures came at a (much) later point. Today, these “bare necessities” comprise only about 20% of total volume of Forex trading – the rest being speculative trades whose only goal is to turn a profit (it is advantageous to find reliable and transparent broker, such as HotForex, in order to help you manage your risks carefully).
In comparison with another markets that sets Forex markets apart is that the object of trade (i.e. currency) is never traded alone, but paired up with (or against) another currency. These currency pairs are composed of a short and long currency, the short one being the one you give and the long one the one you receive in return. The other markets “pair” their objects and currency.
Forex markets are nowhere nearly as regulated as in comparison with other markets. While less regulation means less bureaucracy and more profits, there is no central authority so all trades are based on credit agreements, which means: no guarantees, no arbitration to settle disputes, no clearing houses – so be careful out there. How does this even work? Forex markets are self-regulated, which actually works surprisingly well, as major players typically depend on one another and oversee everyone else. The lack of regulation also allows things other markets do not: there is no ban on short-selling, no limits on your position (you are only limited by your capital), no pesky uptick rules, no penalty for insider trading etc. Whether this is a good thing or not is entirely up to you to decide.