What Is Spot FOREX?

Currencies

The international foreign exchange system is the largest market in the world, with a daily turnover of more than $1 trillion. Spot FOREX is the oldest and purest currency exchange mechanism around, in which market participants can trade actual bank notes against one another, oftentimes with a degree of leverage unobtainable in any other market.

History

The signing of the Breton Woods Agreement in 1944 created a global system of financial exchange between the powers that were to emerge victorious in World War II. This laid down the pillars of what would become a heavily computerized, highly automated, over-the-counter Spot foreign exchange market that now binds together almost every country, along with tens of thousands of corporations and millions of individual investors.

Market Participants

The main players in the spot FOREX market are central banks, such as the European Central Bank and Federal Reserve, large financial institutions, broker/dealers, hedge funds and small-time retail traders.

Spot Forex Pairs

In FOREX, a pair is created when one currency is matched against another---for example, the U.S. dollar against the Japanese yen, or USD/JPY. When trading this pair, if you buy dollars you are simultaneously selling an equivalent number of yen, for immediate delivery to the over-the-counter broker/dealer. This differs from currency futures trading, in which an investor is only liable to make or accept delivery of bank notes upon contract expiration.

Leverage

Spot Forex trading is popular with many minimally capitalized retail traders because brokers offer them the ability to make bets 50 to 100 times in excess of the collateral they post for a trade.

Potential

As industrialized countries around the world increasingly resort to deficit spending, large-scale foreign borrowing and printing fiat currency to try to stimulate economic growth, the spot FOREX market has the potential to expand greatly.

References

• Investopedia: Difference Between Spot Forex and Futures