Investment or investing] is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. Literally, the word means the "action of putting something in to somewhere else" (perhaps originally related to a person's garment or 'vestment').

The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.

In finance, investment is buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price.

Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.

Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.

Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

In finance, investment is buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price.

Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.

Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.

Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

Money is any good or tokens that functions as a medium of exchange that is socially and legally accepted in payment for goods and services and in settlement of debts. Money also serves as a standard of value for measuring the relative worth of different goods and services and as a store of value. Some authors explicitly require money to be a standard of deferred payment. Money is central to the study of economics and forms its most cogent link to finance. Money is not the same as real value; the latter being the basic element in economics and not money.

In common usage, money refers more specifically to currency, particularly the many circulating currencies with legal tender status. The absence of money causes an economy to be inefficient because it requires a coincidence of wants between traders, and an agreement that these needs are of equal value, before a transaction can occur. The efficiency gains through the use of money are thought to encourage trade and the division of labour, in turn increasing productivity and wealth.

Interest

Interest is a fee paid on borrowed money. The fee is a compensation to the lender for foregoing other useful investments that could have been made with the loaned money. The amount lent is called the principal. The percentage of the principal which is paid as fee (the interest), over a certain period of time, is called the interest rate.

Compound interest: Compound Interest is very similar to Simple Interest. The difference is that the principal changes with every time period, unlike simple interest, where the principal remains the same. The new principal at the end of every time period is essentially the simple interest on the principal at the beginning of the time period, added to the principal.

For example, suppose p is the principal, and r and t have the same meanings as above. The principal at the end of the first period will be p*r (for t=1 period). Similarly, the principal at the end of the second period will be (r*r)*r. Thus we can land upon a general formula:

CI = p * (r)t

CA = r * ( 1 + r )t

Where compound interest (CI) is the product of the principal (p), and the rate (r) in decimal form raised to the power of the number of terms (t); and the compound amount (CA) is the product of rate (r) and the quantity of the rate (r) plus one, raised to the power of the number of terms (t).

A problem with compound interest is that the resulting obligation can be difficult to interpret. To simplify this problem, a common economics convention is to disclose the interest rate as though the term were one year, with annual compounding, yielding the effective interest rate. However, interest rates in lending are often quoted as nominal interest rates, i.e., compounding interest uncorrected for the frequency of compounding. The discussion at compound interest shows how to convert to and from the different measures of interest.

Loans often include various non-interest charges and fees. One example are points on a mortgage loan in the United States. When such fees are present, lenders are regularly required to provide information on the 'true' cost of finance, often expressed as an annual percentage rate (APR). The APR attempts to expresses the total cost of a loan as an interest rate after including the additional fees and expenses, although details may vary by jurisdiction.

Economic Characteristics

Money is not generally considered to have the following characteristics, which are summed up in a rhyme found in older economics textbooks and a primer: "Money is a matter of functions four, a medium, a measure, a standard, a store."

There have been many historical arguments regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. 'Financial capital' is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender.

Medium Of Exchange

A medium of exchange is an intermediary used in trade. An effective medium of exchange should have the following characteristics:

•It should also be recognizable as something of value. Person A should recognize the value of the item so that Person B can give it to A in exchange for goods or services.

•It should be easily transportable; precious metals have a high value to weight ratio. This is why oil, coal, vermiculite, or water are not convenient in this regard.

•It should be durable. Money is often left in pockets through the wash. Some countries (such as Australia, New Zealand, Mexico and Singapore) are making their bank notes out of plastic for increased durability. Gold coins are often mixed with copper to improve durability.

Unit Of Account

A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary pre-requisite for the formulation of commercial agreements that involve debt.

An effective unit of account should be:

•Divisible into small units without destroying its value; precious metals can be coined from bars, or melted down into bars again.

•Fungible: that is, one unit or piece must be exactly equivalent to another, which is why diamonds, works of art or real estate are not suitable as money.

•A specific weight, or measure, or size to be verifiably countable. For instance, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.

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Store Of Value

To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved. Fiat currency like paper or electronic currency no longer backed by gold in most countries is not considered by some economists to be a storage of value.

An effective store of value should have the following characteristics:

•It should be long lasting and durable; it must not be perishable or subject to decay. This is why food items, expensive spices, or even fine silks or oriental rugs are not generally suitable as money.

•It should have a stable value.

•It should be difficult to counterfeit, and the genuine must be easily recognizable.

Market Liquidity

The fourth and final function of money, as a means of liquidity. It is important for any economy to move beyond a simple system of bartering. Liquidity describes how easy it is an item can be traded for something that you want, or into the common currency within an economy. Money is the most liquid asset because it is universally recognised and accepted as the common currency. In this way, money gives consumers the freedom to trade goods and services easily without having to barter.

Liquid financial instruments are easily tradable and have a low transaction costs. There should be no or minimal spread between the prices to buy and sell the instrument being used as money.

Types Of Money

In economics, money is a broad term that refers to any instrument that can be used in the resolution of debt. However, not all money is created equal.

One theoretician, Ludwig von Mises, argued for the importance of distinguishing between three types of money: commodity money, fiat money, and credit money. Each carries different economic strengths and liabilities - a point driven home in his book The Theory of Money and Credit.

Modern monetary theory also distinguishes between different types of money, using a categorization system that focuses on the liquidity of money.

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Commodity Money

Commodity money is any money that is both used as a general purpose medium of exchange and as a tradable commodity in its own right.

Commodity based currencies are often viewed as more stable, but this is not always the case. The value of a commodity based currency as a medium of exchange depends on its supply relative to other goods and services available in the economy.

Historically, gold, silver and other metals commonly used in commodity based monetary systems have been subject to regular and sometimes extraordinary fluctuations in purchasing power. This not only damages its stability as a medium of exchange; it also reduces its effectiveness as a store of value. In the 1500 and 1600's huge quantities of gold and even larger amounts of silver were discovered in the New World and brought back to Europe for conversion into coin, the purchasing power of those coins fell by 60% to 80%, i.e. prices of commodities rose, because the supply of goods for sale did not keep pace with the increased supply of money.In addition, the relative value of silver to gold shifted dramatically downward.] More recently, from 1980 to 2001, gold was a particularly poor store of value, as gold prices dropped from a high of $850/oz. to a low of $255/oz. The advantage of gold and silver, however, lies in the fact that, unlike fiat paper currency, the supply cannot be increased arbitrarily by a central bank.

It is also possible for the trading value of a commodity money to be greater than its value as a medium of exchange. When this happens people will often start melting down coins and reselling the metal used to make them. This has happened periodically in the United States, eventually causing it to move away from pure silver nickels and pure copper pennies.[citation needed] Shipping coins from one jurisdiction to another so that they could be reminted was sometimes a lucrative trade before the advent of trusted paper money.[citation needed]

Commodity money's ability to function as a store of value is also limited by its very nature. Copper and tin risk rust and corrosion. Gold and silver are soft metals that can lose weight through scratches and abrasions.

Stability aside, commodity based currencies are limiting in a rapidly growing or very active economy. The supply of money in an economy must be equal or greater than the volume of trade. If commodities are used as money, then the money supply must equal the total amount of goods and services sold. In a large economy, the volume of trade can easily outstrip the supply of any one commodity.

This problem is compounded by the fact that money also serves as a store of value. This encourages hoarding and takes the commodity money out circulation, reducing the supply. The supply of circulating commodity currency is further reduced by the fact that commodity moneys also have competing non-monetary uses. For example, gold and silver is used in jewelery and nickel and copper have important industrial uses.

Commodity based currencies also limit the geographic extent of the trading market. To make large purchases either a large volume or a high weight or both of the commodity must be transported to the seller. The cost of transportation of the currency raises the transaction cost and makes long distance sales less attractive.

Fiat Money

Fiat money is any money whose value is determined by legal means rather than the relative availability of goods and services. Fiat money may be symbolic of a commodity or government promises.[

Fiat money provides solutions to several limitations of commodity money. Depending on the laws, there may be little or no need to physically transport the money - an electronic exchange may be sufficient. Its sole use is as a medium of exchange so its supply is not limited by competing alternate uses. It can be printed without limit, so there is no limit on trade volumes.

Fiat money, especially in the form of paper or coins, can be easily damaged or destroyed. However, it has an advantage over commodity money in that the same laws that created the money can also define rules for its replacement in case of damage or destruction. For example, the US government will replace mutilated paper money if at least half of the bill can be reconstructed.]. By contrast commodity money is gone for good.

Paper money is especially vulnerable to everyday hazards: from fire, water, termites, and simple wear and tear. Money in the form of minted coins is sometimes destroyed by children placing it on railroad tracks or in amusement park machines that restamp it. In order to reduce replacement costs, many countries are converting to plastic bills. For example, Mexico has changed its twenty and fifty pesos notes, Singapore its $2 and $10 bills, Malaysia with $1, $5, $10, $50 and $100, and Australia and New Zealand their $5, $10, $20, $50 and $100 to plastic for the increased durability.

Some of the benefits of fiat money can be a double-edged sword. For example, if the amount of money in active circulation outstrips the available goods and services for sale, the effect can be inflationary. This can easily happen if governments print money without attention to the level of economic activity or counterfeiters are allowed to flourish.

Perhaps the biggest criticism of paper money relates to the fact that its stability is highly dependent on the stability of the legal system backing the currency. Should the legal system fail, so would the currency that depends on it.

Credit Money

Credit money is any claim against a physical or legal person that can be used for the purchase of goods and servicesCredit money differs from commodity and fiat money in two important ways: It is not payable on demand and there is some element of risk that the real value upon fulfillment of the claim will not be equal to real value expected at the time of purchase

This risk comes about in two ways and affects both buyer and seller.

First it is a claim and the claimant may default (not pay). High levels of default have destructive supply side effects. If manufacturers and service providers do not receive payment for the goods they produce, they will not have the resources to buy the labor and materials needed to produce new goods and services. This reduces supply, increases prices and raises unemployment, possibly triggering a period of stagflation. In extreme cases, widespread defaults can cause a lack of confidence in lending institutions and lead to economic depression. For example, abuse of credit arrangements is considered one of the significant causes of the Great Depression of the 1930s.

The second source of risk is time. Credit money is a promise of future payment. If the interest rate on the claim fails to compensate for the combined impact of the inflation (or deflation) rate and the time value of money, the seller will receive less real value than anticipated. If the interest rate on the claim overcompensates, the buyer will pay more than expected.

Over the last two centuries, credit money has steadily risen as the main source of money creation, progressively replacing first commodity then fiat money.

The main problem with credit money is that its supply moves in line with credit booms and bust. When lenders are optimistic (notably when the debt level is low), they increase their lendings activity, thus creating new money and triggering inflation, when they are pessimistic (for instance because the debt level is perceived as so high that defaults can only follow), they reduce their lending activities, bankruptcies and deflation follows.

Money Supply

The money supply is the amount of money within a specific economy available for purchasing goods or services. The supply in the US is usually considered as four escalating categories M0, M1, M2 and M3. The categories grow in size with M3 representing all forms of money (including credit) and M0 being just base money (coins, bills, and central bank deposits). M0 is also money that can satisfy private banks' reserve requirements. In the US, the Federal Reserve is responsible for controlling the money supply, while in the Euro area the respective institution is the ECB. Other central banks with significant impact on global finances are the Bank of Japan, People's Bank of China and the Bank of England.

When gold is used as money, the money supply can grow in either of two ways. First, the money supply can increase as the amount of gold increases by new gold mining at about 2% per year, but it can also increase more during periods of gold rushes and discoveries, such as when Columbus discovered the new world and brought gold back to Spain, or when gold was discovered in California in 1848. This kind of increase helps debtors, and causes inflation, as the value of gold goes down. Second, the money supply can increase when the value of gold goes up. This kind of increase in the value of gold helps savers and creditors and is called deflation, where items for sale are increasingly less expensive in terms of gold. Deflation was the more typical situation for over a century when gold and credit money backed by gold were used as money in the US from 1792 to 1913.

Monetary Policy

Monetary policy is the process by which a government, central bank, or monetary authority manages the money supply to achieve specific goals. Usually the goal of monetary policy is to accommodate economic growth in an environment of stable prices. For example, it is clearly stated in the Federal Reserve Act that the Board of Governors and the Federal Open Market Committee should seek “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." [

A failed monetary policy can have significant detrimental effects on an economy and the society that depends on it. These include hyperinflation, stagflation, recession, high unemployment, shortages of imported goods, inability to export goods, and even total monetary collapse and the adoption of a much less efficient barter economy. This happened in Russia, for instance, after the fall of the Soviet Union.

Governments and central banks have taken both regulatory and free market approaches to monetary policy. Some of the tools used to control the money supply include:

•currency purchases or sales

•increasing or lowering government spending

•increasing or lowering government borrowing

•changing the rate at which the government loans or borrows money

•manipulation of exchange rates

•taxation or tax breaks on imports or exports of capital into a country

•raising or lowering bank reserve requirements

•regulation or prohibition of private currencies

For many years much of monetary policy was influenced by an economic theory known as monetarism. Monetarism is an economic theory which argues that management of the money supply should be the primary means of regulating economic activity. The stability of the demand for money prior to the 1980s was a key finding of Milton Friedman and Anna Schwartz ] supported by the work of David Laidler, and many others.

The nature of the demand for money changed during the 1980s owing to technical, institutional, and legal factors and the influence of monetarism has since decreased.

The History Of Money

The origin of the word "money" comes from the Latin word "moneta", an epithet of Juno (Hera) -- Juno Moneta, "June the Alone" -- the deity that protected and oversaw finances in the early days of Rome.

In Greek language, "Hera Mone tas" means the lonely Hera ("Mone tas" in Doric Greek, "Mone tes" in Ionic dialect). Zeus punished Hera and tied her with a golden chain between the earth and sky. Hera, because she was alone between the sky and earth tied with gold, was called moneres or mone (µ???) (lonely in Greek), and the word money was derived from this. Hera, with the help of Hephaestus, broke the golden chain and released herself. It is said that all gold found on earth (which forms approximately a single cube 20 m a side) originates from the fragments of this golden chain, which fall from the sky and became human's mone (money).

Perhaps because of this fable, gold was used in ancient Greece only in temples, graves and jewels and there is not any ancient Greek golden coin, until the days around 390 BC, when the Greek king Philip II of Macedon minted golden coins. The first golden coins in history were coined by Lydian king Croesus, around 560 BC. The first Greek coins were made initially of copper, then of iron because copper and iron were powerful materials used to make weapons. Pheidon king of Argos, around 700 BC, changed the coins from iron to a rather useless and ornamental metal, silver, and, according to Aristotle, dedicated some of the remaining iron coins (which were actually iron sticks) to the temple of Hera. King Pheidon coined the silver coins at Aegina, at the temple of the goddess of wisdom and war Athena the Aphaia (the vanisher), and engraved the coins with a Chelone, which is to this day as a symbol of capitalism. Chelone coinswere the first medium of exchange that was not backed by a real value good. They were widely accepted and used as the international medium of exchange until the days of Peloponnesian War, when the Athenian Drachma replace them. According other fables, inventors of money were Demodike(or Hermodike) of Kymi (the wife of Midas), Lykos (son of Pandion II and ancestor of the Lycians) and Erichthonius, the Lydians or the Naxians.

Quotations On Money

•"No one can serve two masters, for either he will hate the one and love the other; or else he will be devoted to one and despise the other. You can't serve both God and Mammon." Gospel of Matthew 6:24

•"For the love of money is a root of all kinds of evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows." First Epistle to Timothy 6:10

•"When it's a question of money, everybody is of the same religion." Voltaire

•"Only when the last tree has died and the last river been poisoned and the last fish been caught will we realise we cannot eat money." Cree proverb

•"When I have money, I get rid of it quickly, lest it find a way into my heart." John Wesley

•"Money. It's a gas." Pink Floyd

•"Everybody loves money. That's why it's called 'money'." Danny DeVito

•"Money doesn't talk, it swears." Bob Dylan

•"I spend money with reckless abandon. Last month I blew five thousand dollars at a reincarnation seminar. I got to thinking, what the hell, you only live once." Ronnie Shakes

•"So you think that money is the root of all evil? Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?" Ayn Rand

•"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks creates money is so simple that mind is repelled." John Kenneth Galbraith

•"If you want to know what a man is really like, take notice of how he acts when he loses money." New England Proverb

•"Money is a stupid measure of achievement, but unfortunately it is the only universal measure we have." - Charles Steinmetz

The Romans of the late Republic had their own alternative theories for why the Temple of Juno was known as Juno Moneta. Cicero, and others, claimed the epithet was of goddess, in honor of Juno's role as warder (monitor) who sent warnings to Rome, often through her geese; alternately, the name could be the name of the temple itself, Juno of the Hill (mons, montis).

It is very unusual for someone to share his money with others and let them know where his/her money is, almost everyone wants to be alone in front of it and tries to hide it and protect it from others. Everyone is alone in front of money, and money makes everyone to be alone. So the etymology of money deriving from the greek µ??? (lonely) makes sense.

The word money in Greek language is not µ??? (money), it is ??µ'sµa (nomisma or numisma) which derives from the word ??µ??? (nomizo=putative,I think so,I suppose so) and from the word ??µ?? (nomos=law). So numisma gives the exact meaning and definition of mone(y). It is something we think has value, or something which someone has convinced us has, but in reality has not. In case we are unconvinced that mone(y) has value and we do not recognize the mone(y) maker authority, mone(y) is also something that we are enforced by law to use it as the unique medium of exchange in trades. In case an individual or a community refuses to accept mone(y) as the unique medium of exchange, then the powerful mone(y) maker authority, using violence and the taxes procedure, steals the real value goods (home,food,transport,energy) that the individual or the community owns. That is why many individuals or communities hide their goods from mone(y)-maker authorities. The crime of hiding goods from a mone(y)-maker authority is called tax evasion.

" He who has an ear, let him hear what the Spirit says to the churches. To the winner, I will give some of the hidden manna and I will also give him a white vote with a new name written on it which no one knows except the one who receives it."(Book of Revelation 2:17).

One of the words for money in the Hebrew language is mammon. Mammon does have more than one meaning depending on its linguistic and etymological contexts. The Hebrew and Christian Bible gives the word mammon a broader context in its socioeconomic, cultural, and theological usages. Mammon, a word of Aramaic origin, means "riches", but has an unclear etymology; scholars have suggested connections with a word meaning "entrusted", or with the Hebrew word "matmon", meaning "treasure".[citation needed] It is also used in Hebrew as a word for "money" - ????.

The Greek word for "Mammon", mamonas, occurs in the Sermon on the Mount (Matthew vi 24) and in the parable of the Unjust Steward (Luke xvi 9-13). The Authorised Version keeps the Syriac word. Wycliffe uses "richessis". Other scholars derive Mammon from Phoenician "mommon", benefit. It is interesting to note that if mammon(as) (µaµ????) is considered as a Greek word and as a composite one (the majority of Greek words are composites), the two parts "mam-mon(as)" could be explained (in Greek doric) as "lonely mother", which recalls Hera's myth mentioned above. Other explanations could be mamm(means "mother" or "food")-onas(means "a place where you can find mamm"), also mam(means "mother" or "food")-m(means "with")-on(means "being")-as(with Circumflex, means "owner or seller").

Another word for money in Hebrew is the word Kessef-???, that translates to silver. Also the french word for money, Argent, derives from the Greek ???????, and translates also to silver.

According to the Book of Revelation, the mark of the beast seems to be a form of money: "And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads: And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name. Here is wisdom. Let him that hath understanding vote the number of the beast: for it is the number of a man; and his(its) number is ???." (Book of Revelation 13:16-13:18).

Foreign Exchange Market

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex markets currently exceeds US$1.9 trillion. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks.

Market Size And Liquidity

The foreign exchange market is unique because of:

•its trading volume,

•the extreme liquidity of the market,

•the large number of, and variety of, traders in the market,

•its geographical dispersion,

•its long trading hours - 24 hours a day (except on weekends).

•the variety of factors that affect exchange rates,

According to the BIS , average daily turnover in traditional foreign exchange markets was estimated at $1,880 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below:

Global foreign exchange market turnover:

•$621 billion

•$1.26 trillion in derivatives, ie

•$208 billion in outright forwards

•$944 billion in forex swaps

•$107 billion in FX options.

Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).

Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market. [

Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006.

The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 0-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000.

These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition has greatly increased with pip spreads shrinking on the major pairs to as little as 1 to 2 pips

Market Participants

Source: Euromoney FX survey[3]

Top 10 Currency Traders

% of overall volume, May 2006

RankName % of volume

1Deutsche Bank19.26

2UBS AG11.86

3Citigroup10.39

4Barclays Capital6.61

5Royal Bank of Scotland6.43

6Goldman Sachs5.25

7HSBC5.04

8Bank of America3.97

9JPMorgan Chase3.89

10Merrill Lynch3.68

Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line" (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s." (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001-2004 period in terms of both number and overall size" Central banks also participate in the forex market to align currencies to their economic needs.

Banks

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS (now owned by ICAP), Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Commercial Companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Central Banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in Southeast Asia.

Investment Management Firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization.

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.

Hedge Funds

Hedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Retail Forex Brokers

Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion daily, which is about 2% of the whole market and it has been reported by the CFTC website that unexperienced investors may become targets of forex scams.

Trading Characteristics

There is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate - but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs.

Top 6 Most Traded Currencies

RankCurrencyISO 4217 CodeSymbol

1United States dollarUSD$

2Eurozone euroEUR€

3Japanese yenJPY¥

4British pound sterlingGBP£

5-6Swiss francCHF-

5-6Australian dollarAUD$

The main trading centers are in London, New York, Tokyo, and Singapore, but banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the US session and then back to the Asian session, excluding weekends.

There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.3045 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.

The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.

On the spot market, according to the BIS study, the most heavily traded products were:

•EUR/USD - 28 %

•USD/JPY - 18 %

•GBP/USD (also called sterling or cable) - 14 %

and the US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%). (Note that volume percentages should add up to 200% - 100% for all the sellers, and 100% for all the buyers).

Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus far still largely dollar-centered. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market.

Factors Affecting Currency Trading

Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.

Economic Factors

These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).

Economic conditions include:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency.

Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

Political Conditions

Internal, regional, and international political conditions and events can have a profound effect on currency markets.

For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.

Market Psychology

Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

Flights to quality: Unsettling international events can lead to a "flight to quality" -with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts.

Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect - the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form patterns that may be recognized and utilized by traders for the purpose of entering and exiting the market, leading to short-term fluctuations in price. Many traders study price charts in order to identify such patterns

Algorithmic Trading In Forex

Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. There is much confusion about the technique. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.

Financial Instruments

There are several types of financial instruments commonly used.

Spot: A spot transaction is a two-day delivery transaction, as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange" between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. The data for this study come from the spot market. Spot has the largest share by volume in FX transactions among all instruments.

Forward transaction: One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a few days, months or years.

Futures: Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

Swap: The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not contracts and are not traded through an exchange.

Options: A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

Speculation

Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, many economists (e.g. Milton Friedman) have argued that speculators perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists (e.g. Joseph Stiglitz) however, may consider this argument to be based more on politics and a free market philosophy than on economics.

Large hedge funds and other well capitalized "position traders" are the main professional speculators.

Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not, according to this view; it is simply gambling, that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.

Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators only made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.

In politics, a capital (also called capital city or political capital — although the latter phrase has a second meaning based on an alternative sense of "capital") is the principal city or town associated with a country's government. It is almost always the city which physically encompasses the offices and meeting places of the seat of government and fixed by law.

The word capital is derived from the Latin caput meaning "head," and the related term capitol refers to the building where government business is chiefly conducted.

Seats of government in major sub-state jurisdictions are often called "capitals", but this is typically the case only in countries with some degree of federalism, where major substate jurisdictions have an element of sovereignty. In unitary states, "administrative center" or other similar terms are typically used. For example, the seat of government in a state of the United States of America is usually called its "capital", but the main city in a region of England is usually not. At lower administrative subdivisions, terms such as county town, county seat, or borough seat are usually used.

Historically, the major economic center of a state or region often becomes the focal point of political power, and becomes a capital through conquest or amalgamation. This was the case for London and Moscow. The capital naturally attracts the politically motivated and those whose skills are needed for efficient administration of government such as lawyers, journalists, and public policy researchers. A capital that is the prime economic, cultural, or intellectual center is sometimes referred to as a primate city. Such is certainly the case with London and Buenos Aires among national capitals, and Irkutsk or Salt Lake City in their respective state or province.

Capitals are sometimes sited to discourage further growth in an existing major city. Brasília was situated in Brazil's interior because the old capital, Rio de Janeiro, and southeastern Brazil in general, was considered over-crowded.

The convergence of political and economic or cultural power is by no means universal. Traditional capitals may be economically eclipsed by provincial rivals, as occurred with Nanjing by Shanghai. The decline of a dynasty or culture could also mean the extinction of its capital city, as occurred with Babylon and Cahokia. Many present-day capital cities, such as Abuja, Brasília, Canberra, Ottawa and Washington, D.C. are planned cities, purposefully located away from established population centres for various reasons, and have become gradually established as new business or commercial centres.

In economics, continuous compounding is often used due to its particular mathematical properties.

In politics, a capital (also called capital city or political capital — although the latter phrase has a second meaning based on an alternative sense of "capital") is the principal city or town associated with a country's government. It is almost always the city which physically encompasses the offices and meeting places of the seat of government and fixed by law.

The word capital is derived from the Latin caput meaning "head," and the related term capitol refers to the building where government business is chiefly conducted.

Seats of government in major sub-state jurisdictions are often called "capitals", but this is typically the case only in countries with some degree of federalism, where major substate jurisdictions have an element of sovereignty. In unitary states, "administrative center" or other similar terms are typically used. For example, the seat of government in a state of the United States of America is usually called its "capital", but the main city in a region of England is usually not. At lower administrative subdivisions, terms such as county town, county seat, or borough seat are usually used.

Historically, the major economic center of a state or region often becomes the focal point of political power, and becomes a capital through conquest or amalgamation. This was the case for London and Moscow. The capital naturally attracts the politically motivated and those whose skills are needed for efficient administration of government such as lawyers, journalists, and public policy researchers. A capital that is the prime economic, cultural, or intellectual center is sometimes referred to as a primate city. Such is certainly the case with London and Buenos Aires among national capitals, and Irkutsk or Salt Lake City in their respective state or province.

Capitals are sometimes sited to discourage further growth in an existing major city. Brasília was situated in Brazil's interior because the old capital, Rio de Janeiro, and southeastern Brazil in general, was considered over-crowded.

The convergence of political and economic or cultural power is by no means universal. Traditional capitals may be economically eclipsed by provincial rivals, as occurred with Nanjing by Shanghai. The decline of a dynasty or culture could also mean the extinction of its capital city, as occurred with Babylon and Cahokia. Many present-day capital cities, such as Abuja, Brasília, Canberra, Ottawa and Washington, D.C. are planned cities, purposefully located away from established population centres for various reasons, and have become gradually established as new business or commercial centres.

Unorthodox capital city arrangements

A number of cases exist where states or other entities have multiple capitals, and there are also several states that have no capital. In others, the "effective" and "official" capital may differ for pragmatic reasons, resulting in a situation where a city known as "the capital" is not, in fact, host to the seat of government. Likewise, occasionally the official "capital" as called may be host to the seat of government, but is not always the geographic origin of political decision-making.

•Former British protectorate of Bechuanaland, today Botswana, was administered from Mafeking (now Mafikeng), creating a unique situation of the capital of the territory being located outside of it.

•Bolivia: Sucre is still the constitutional capital, but most of the national government long abandoned that region for La Paz.

•Chile: Santiago is understood to be the capital even though the National Congress of Chile is in Valparaíso.

•Côte d'Ivoire: Yamoussoukro was designated the national capital in 1983, but most government offices and embassies are still located in Abidjan.

•European Union: Brussels, Belgium is generally treated as the 'capital' of the European Union, and the two institutions of the EU's executive, the European Commission and the Council of Ministers, both have their seats there. However, a protocol attached to the Treaty of Amsterdam requires that the European Parliament have monthly sessions in Strasbourg, France.

•In Germany, the executive and legislative capital is Berlin, although a portion of various ministerial back offices are located in the former West German capital of Bonn. The judicial branch of the government is divided between Karlsruhe and Leipzig.

•Montenegro: Cetinje is the constitutional capital, but much greater Podgorica is the administrative centre.

•Nauru: Nauru, a tiny country of only 21 square kilometres (8 sq mi), has no capital city.

•The Netherlands: Amsterdam is the constitutional national capital even though the Dutch government, parliament, supreme court and the palace of the queen are all located in The Hague.

•In South Africa, the administrative capital is Pretoria, the legislative capital is Cape Town, and the judicial capital is Bloemfontein, the outcome of the compromise that created the Union of South Africa in 1910.

•Switzerland: The city of Bern serves as de facto capital of Switzerland ("Federal City"), however, the Swiss Supreme Court is located in Lausanne.

•City-states like Singapore have no capital city distinct from the country as a whole.

Capital as symbol

With the rise of modern empires and the nation-state, the capital city has become a symbol for the state and its government, and imbued with political meaning. Unlike medieval capitals, which were declared wherever a monarch held his or her court, the selection, relocation, founding or capture of a modern capital city is an emotional affair. For example:

•Ruined and almost uninhabited Athens was made capital of newly independent Greece with the romantic notion of reviving the glory of the ancients. Similarly, following the Cold War and German reunification, Berlin is now once again the capital of the country. Other restored capital cities include Moscow after the October Revolution.

•A symbolic relocation of a capital city to a geographically or demographically peripheral location may be for either economic or strategic reasons (sometimes known as a "forward capital" or spearhead capital). Peter I of Russia moved his government from Moscow to Saint Petersburg to give the Russian Empire a western orientation, while Kemal Atatürk did the same by actually moving east, to Ankara, away from more Ottoman Istanbul. The Ming Emperors moved their capital to Beijing from more central Nanjing