The foreign exchange market is the largest market by total nominal value of all things traded. That is, the forex volume makes it the largest market on earth. Each day, some $4 trillion in value trades hands between governments, institutional investors, corporations, and individual traders who trade world currencies between themselves.
Other markets find it hard to compete against the foreign exchange market’s massive size.
Having a large market isn’t a benefit of itself. While being big is good, it isn’t just the size that makes the foreign exchange market one of the best markets for traders. Instead, it is the secondary benefits that come from the market’s size that make it an excellent market to trade.
Liquidity is one of these fringe benefits.
Liquidity is a word that describes how easily a financial product—in this case, a currency—can be bought and sold on the market. When markets are highly-liquid, they allow traders to buy and sell large amounts of currency in an instant. When markets are less liquid, buyers and sellers may have to wait for a transaction, or even worse, they may not be able to complete a transaction at a price that is close to the current market price.
Let’s look at two common investments to show how liquidity works. We’ll compare real estate and currencies:
Real estate – Real estate is a very illiquid investment because there aren’t many buyers and sellers. In many cases, it takes weeks, months, or even years to find a match between buyers and sellers in the market. To sell real estate quickly, a seller would have to agree to offer a very big discount to attract a lot of buyers. That’s not good from the sellers perspective, since they are losing money each time they lower their price.
Currencies – Everyone has to use currencies, and unlike houses, currencies are the same thing as long as they’re worth the same amount of money–a $20 bill isn’t any different from 4 $5 bills. As a result, currencies can be exchanged easily and rapidly, since there are many buyers and sellers. To sell $100,000 for euros, for example, isn’t nearly as hard as selling a $100,000 house to a buyer. There are many different types of $100,000 houses, but there isn’t a difference between $100,000 worth of currency.
Other markets find it hard to compete against the foreign exchange market’s massive size.
Having a large market isn’t a benefit of itself. While being big is good, it isn’t just the size that makes the foreign exchange market one of the best markets for traders. Instead, it is the secondary benefits that come from the market’s size that make it an excellent market to trade.
Liquidity is one of these fringe benefits.
Liquidity is a word that describes how easily a financial product—in this case, a currency—can be bought and sold on the market. When markets are highly-liquid, they allow traders to buy and sell large amounts of currency in an instant. When markets are less liquid, buyers and sellers may have to wait for a transaction, or even worse, they may not be able to complete a transaction at a price that is close to the current market price.
Let’s look at two common investments to show how liquidity works. We’ll compare real estate and currencies:
Real estate – Real estate is a very illiquid investment because there aren’t many buyers and sellers. In many cases, it takes weeks, months, or even years to find a match between buyers and sellers in the market. To sell real estate quickly, a seller would have to agree to offer a very big discount to attract a lot of buyers. That’s not good from the sellers perspective, since they are losing money each time they lower their price.
Currencies – Everyone has to use currencies, and unlike houses, currencies are the same thing as long as they’re worth the same amount of money–a $20 bill isn’t any different from 4 $5 bills. As a result, currencies can be exchanged easily and rapidly, since there are many buyers and sellers. To sell $100,000 for euros, for example, isn’t nearly as hard as selling a $100,000 house to a buyer. There are many different types of $100,000 houses, but there isn’t a difference between $100,000 worth of currency.
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