Introduction to Forex or Foreign Exchange Market for Kids and Teens
This video explains the concept of forex in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about foreign exchange market, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is Forex or Forex Market
- How does Forex work
- Different types of foreign exchange markets
- What is the forex market used for
- Advantages of forex trading
- Disadvantages of foreign exchange trading
- Should I invest in the Forex market
What is Forex or Foreign Exchange Market?
Forex – also known as FX or foreign exchange – refers to the trading of one country’s currency for another’s.
The forex market is a global over-the-counter (or OTC) marketplace where participants can trade currencies or derivatives of currencies. These participants include banks, forex dealers, hedge funds, retail investors, etc.
It is the largest financial market in the world with TRILLIONS of dollars traded each day, and is open 24 hours a day, except on weekends.
Forex market is used for a wide variety of reasons: commerce, hedging, speculation, portfolio diversification, tourism, etc.
How does forex work?
Forex trading is done over the counter, electronically. This means that transactions happen on computer networks around the world, instead of through one centralized exchange.
Currency exchange rates change by the second so the market is constantly fluctuating.
When someone makes a trade on the Forex market, they are trading a currency pair – meaning that they are selling one currency while buying the other.
For example, if someone was trading US Dollars for Euros, they are selling US Dollars and simultaneously buying Euros.
Are there different types of foreign exchange markets?
There are three main types of forex markets.
The spot forex market is the largest of the three. Here, currencies are bought and sold at the current trading prices.
The forward and futures forex markets involve an agreement between 2 parties to exchange currencies at a set price at a set date in the future.
Both of these are derivatives markets, primarily used for hedging. The main difference is that forward contracts are customized and over the counter, whereas futures contracts are standardized and are traded on exchanges.
What is the forex market used for?
One of the obvious uses of the foreign exchange market is to exchange currencies: whether it’s a tourist visiting a country with a different currency, or a business operating with international partners.
However, the majority of the transactions are either for hedging or speculation.
Hedging is used mainly by corporations for managing risk by locking in prices of future sales, so they are not impacted by currency fluctuations.
Just like in the stock market, speculation is used by traders to profit from the rise and fall of currency prices. Portfolio diversification is another reason for trading in the forex market.
What is forex trading? What are its advantages?
Since the Forex market is the largest financial market in the world with TRILLIONS of dollars in daily trading volumes, it offers the most liquidity.
It’s also open 24 hours a day on weekdays, which means you can trade virtually any time of the day.
Also, with the internet making it more accessible to retail investors, the threshold for entering the market has reduced considerably.
Brokerages offer highly leveraged trades allowing retail investors to participate in the market with very little capital and a potential for huge gains.
Also, it’s generally not as strictly regulated as other financial markets – there are no clearing houses or central governing bodies.
Are there any disadvantages of foreign exchange trading?
Many of the advantages of the Forex market can also become disadvantages.
The market being less regulated makes it risky, as there is no central authority overseeing transactions. Very high liquidity also comes with high volatility compared to other markets.
Leverage can also be a double edged sword: while the potential for profit is high, losses also get magnified. And if an investor’s speculation goes wrong, they can lose significant amounts in an instant.
Should you invest in the forex market?
While the benefits of the forex market might seem tempting, for an average individual investor like you and me, Forex trading simply requires far too much time, effort, and knowledge, and comes with very high risk and potential for losses.
Also, there are highly qualified professionals working for financial institutions who trade in the Forex market for a living – they have a thorough understanding of the economic and political indicators of various countries and their impact on currency values.
It’s not easy to compete with these professional traders and make a significant gain and therefore, it is best for individual investors to stay away from Forex investment.