Forex (FX): Definition, How to Trade Currencies
Forex (FX) refers to the global electronic marketplace for trading international currencies and currency derivatives. It has no central physical location, yet the forex market is the largest, most liquid market in the world by trading volume, with trillions of dollars changing hands every day. Most of the trading is done through banks, brokers, and financial institutions.
The forex market is open 24 hours a day, five days a week, except for holidays. The forex market is open on many holidays on which stock markets are closed, though the trading volume may be lower.
Its name, forex, is a portmanteau of foreign and exchange. It’s often abbreviated as fx.
Key Takeaways
- Forex (FX) market is a global electronic network for currency trading.
- Formerly limited to governments and financial institutions, individuals can now directly buy and sell currencies on forex.
- In the forex market, a profit or loss results from the difference in the price at which the trader bought and sold a currency pair.
- Currency traders do not deal in cash. Brokers generally roll over their positions at the end of each day.
What Are Commodities and Understanding Their Role in the Stock Market
Commodities are raw materials used to manufacture consumer products. They are inputs in the production of other goods and services, rather than finished goods sold to consumers.
In commerce, commodities are basic resources that are interchangeable with other goods of the same type. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
Key Takeaways
- A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type.
- Commodities are most often used as inputs in the production of other goods or services.
- Investors and traders can buy and sell commodities directly in the spot (cash) market or via derivatives such as futures and options.
- Hard commodities refer to energy and metals products, while soft commodities are often agricultural goods.
- Many investors view allocating commodities in a portfolio as a hedge against inflation.
Stocks: What They Are
A stock, also known as equity, is a security that represents the ownership of a fraction of the issuing corporation. Units of stock are called shares, which entitle the owner to a proportion of the corporation’s assets and profits equal to how much stock they own.
Key Takeaways
- A stock is a form of security that indicates the holder has proportionate ownership in the issuing corporation and is sold predominantly on stock exchanges.
- Corporations issue stock to raise funds to operate their businesses.
- There are two main types of stock: common and preferred.
- Historically, stocks have outperformed most other investments over the long run.
What Is an Index?
A financial index produces a numeric score based on inputs such as a variety of asset prices. It can be used to track the performance of a group of assets in a standardized way. Indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market.
These could be constructed as a broad-based index that captures the entire market, such as the Standard & Poor’s 500 Index or Dow Jones Industrial Average (DJIA), or more specialized, such as indexes that track a particular industry or segment, such as the Russell 2000 Index, which tracks only small-cap stocks.
Key Takeaways
- An index measures the price performance of a basket of securities using a standardized metric and methodology.
- Indexes in financial markets are often used as benchmarks to evaluate an investment’s performance against.
- Some of the most important indexes in the U.S. markets are the S&P 500 and the Dow Jones Industrial Average.
- Passive index investing has become a popular low-cost way to replicate the returns of popular indices such as the S&P 500 Index or Dow Jones Industrial Average.
- Benchmarking your investment strategy against the appropriate index is key to understanding a portfolio’s performance.
What Is Cryptocurrency?
A cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Most cryptocurrencies exist on decentralized networks using blockchain technology—a distributed ledger enforced by a disparate network of computers.
A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Key Takeaways
- A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
- Some experts believe blockchain and related technologies will disrupt many industries, including finance and law.
- The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure.
- The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities, and use in criminal activities.
