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CAPITAL MARKETS IN ETHIOPIA: HERALDING A NEW ERA

Capital markets in Ethiopia: Heralding a new era

AUGUST 18, 2022

Stakeholders came together to discuss and provide feedback on the proposed draft directives and
proposal that underpin the Capital Market Roadmap leading to the establishment of full-fledged Capital
Markets in Ethiopia.

The consultation was organised in June 2022 by the National Bank of Ethiopia's Capital Market Project
Implementation Team (CMPIT).

The Roadmap has four pillars: market development, infrastructure development, capacity development
and policy reviews. A ten-year implementation action plan accompanies the roadmap.

The CMPIT is currently working on several protocols and other instruments that are critical for the
operationalization of the capital markets.

A well-developed and vibrant capital market can promote economic growth. It can also play a key role
in the efficient allocation of financial resources to areas where they are needed most, generating the
highest return for firms, enabling risk sharing and facilitating the flow of finance to more risky but high-
return projects.
A robust capital market has several beneficial features for different participants in the economy.
Domestic capital markets provide an alternative source of funding that can complement bank financing
for a company or entity in need of funding.

Capital markets can offer better pricing, longer maturities, and access to a wider investor base. They can
also offer to fund riskier activities that would traditionally not be served by the banking sector and so
contribute significantly to innovation in an economy. While some governments can access international
capital markets, the development of local capital markets can increase access to local currency financing
and help better manage foreign exchange risk and inflation.

A vibrant capital market would also allow governments to finance fiscal deficits without resorting to
financial repression or foreign borrowing. In addition, the capital market supports the conduct of
monetary policy through an enhanced monetary transmission mechanism. Moreover, capital markets
also promote national savings, serving as alternative saving and financial investment vehicles for the
public.

Cognizant of the role of capital markets, the NBE issued the Capital Markets Proclamation No.
1248/2021 in 2021 and established the CMPIT to steer the operationalization of the Proclamation. A
well-developed capital market could help to provide a more reliable supply of long-term funding to the
private sector. The Government's effort in this respect, could strengthen the economy’s resilience to
shocks, mitigate the risk posed by an overreliance on the bank-dominated financial sector, and impose
the allocation of resources.

The Capital Market Authority would supervise related activities of the market. The Authority would set
the minimum admission criteria and conditions for enlisting in the exchange such as preparing the
prospectus upon enlisting.

Similarly, the issues of liquidity and transparency are very important to take note of and establish as the
market Roadmap is implemented. According to Ms Martha Ibrahim, one of the presenters, capital
markets are based on trust.
UNDP is supporting the development of the capital market. This included the provision of technical
advisory support, facilitating experience exchange visits to Kenya and Turkey, setting up the CMPIT
office, developing the regulatory frameworks and directives and eventually setting up and
operationalizing the Capital Market Authority.

UNDP continues its partnership with the National Bank of Ethiopia to promote access to innovative and
inclusive finance through establishing an innovative finance lab that would test, pilot, and scale up
innovative financial instruments. Various innovative financial instruments are developed to ensure the
inclusion of MSMEs and other key players in the capital market ecosystem.

CHALLENGES OF CAPITAL MARKET IN ETHIOPIA

the looming economic crisis, a lack of foreign exchange, high inflation, and a constantly changing policy
environment create a less attractive environment for private sector investment, especially foreign direct
investment (FDI).

insider trading, market manipulation, systemic risk, regulatory issues, and financial crises. The future of
capital markets is influenced by technological advancements, regulatory frameworks, globalization, and
the increasing significance of ESG investing.

WHAT IS OVER THE COUNTER MARKET TRADING

TRADE

TABLE OF CONTENTS

STOCK TRADING STOCK TRADING STRATEGY & EDUCATION

Over-the-Counter (OTC): Trading and Security Types

By CHRIS B. MURPHY Updated December 20, 2023

Reviewed by GORDON SCOTT

Fact checked by YARILET PEREZ

What Is Over-the-Counter (OTC)?

Over-the-counter (OTC) is the process of trading securities via a broker-dealer network as opposed to on
a centralized exchange like the New York Stock Exchange.
Over-the-counter trading can involve stocks, bonds, and derivatives, which are financial contracts that
derive their value from an underlying asset such as a commodity.

When companies do not meet the requirements to list on a standard market exchange such as the NYSE,
their securities can be traded OTC but may still be subject to some regulation by the Securities and
Exchange Commission.

Over-the-counter (OTC) securities are traded without being listed on an exchange.

Securities that are traded over-the-counter may be facilitated by a dealer or broker specializing in OTC
markets.

OTC trading helps promote equity and financial instruments that would otherwise be unavailable to
investors.

Companies with OTC shares may raise capital through the sale of stock.

Stocks that trade via OTC are commonly smaller companies that cannot meet the exchange listing
requirements of formal exchanges. Many other types of securities also trade OTC.

Stocks that trade on exchanges are called listed stocks, whereas stocks that trade via OTC are called
unlisted stocks.

Trade transactions can take place through OTC Markets Group's market tiers: the OTCQX; OTCQB; and
the Pink Open Market.

TYPES OF OTC MARKETS

Types of OTC Securities

Stocks
The equities that trade via OTC are often small companies prohibited by the $295,000 cost to list on the
NYSE and up to $75,000 on Nasdaq. Some well-known large companies are listed on the OTC markets,
such as Allianz SE, BASF SE, Roche Holding Ag, and Danone SA.

TRADE

TABLE OF CONTENTS

STOCK TRADING STOCK TRADING STRATEGY & EDUCATION

Over-the-Counter (OTC): Trading and Security Types

By CHRIS B. MURPHY Updated December 20, 2023

Reviewed by GORDON SCOTT

Fact checked by YARILET PEREZ

What Is Over-the-Counter (OTC)?

Over-the-counter (OTC) is the process of trading securities via a broker-dealer network as opposed to on
a centralized exchange like the New York Stock Exchange.

Over-the-counter trading can involve stocks, bonds, and derivatives, which are financial contracts that
derive their value from an underlying asset such as a commodity.

When companies do not meet the requirements to list on a standard market exchange such as the NYSE,
their securities can be traded OTC but may still be subject to some regulation by the Securities and
Exchange Commission.

KEY TAKEAWAYS

Over-the-counter (OTC) securities are traded without being listed on an exchange.

Securities that are traded over-the-counter may be facilitated by a dealer or broker specializing in OTC
markets.

OTC trading helps promote equity and financial instruments that would otherwise be unavailable to
investors.
Companies with OTC shares may raise capital through the sale of stock.

Over the Counter

Investopedia / Laura Porter

Understanding Over-the-Counter (OTC)

Stocks that trade via OTC are commonly smaller companies that cannot meet the exchange listing
requirements of formal exchanges. Many other types of securities also trade OTC.

Stocks that trade on exchanges are called listed stocks, whereas stocks that trade via OTC are called
unlisted stocks.

Trade transactions can take place through OTC Markets Group's market tiers: the OTCQX; OTCQB; and
the Pink Open Market.

FINRA ran an OTC exchange known as the OTC Bulletin Board (OTCBB), but FINRA officially ceased
operations of the OTCBB on Nov. 8, 2021.

Types of OTC Securities

Stocks

The equities that trade via OTC are often small companies prohibited by the $295,000 cost to list on the
NYSE and up to $75,000 on Nasdaq. Some well-known large companies are listed on the OTC markets,
such as Allianz SE, BASF SE, Roche Holding Ag, and Danone SA.

Bonds
Bonds do not trade on a formal exchange but banks market them through broker-dealer networks and
they are also considered OTC securities.

Derivatives

Derivatives are private contracts arranged by a broker and can be exotic options, forwards, futures, or
other agreements whose value is based on that of an underlying asset, like a stock.

ADRs

American Depositary Receipts (ADRs), sometimes called ADSs or bank certificates that represent a
specified number of shares of a foreign stock.

Foreign Currency

Foreign currencies that trade on the Forex, an over-the-counter currency exchange.

Cryptocurrency

Cryptocurrencies, like Bitcoin and Ethereum trade on the OTC market.

OTC Markets

OTC Markets Group operates some of the most well-known networks, such as the OTCQX Best Market,
the OTCQB Venture Market, and the Pink Open Market. Although OTC networks are not formal
exchanges such as the NYSE, they still have eligibility requirements determined by the SEC.

TABLE OF CONTENTS

STOCK TRADING STOCK TRADING STRATEGY & EDUCATION

Over-the-Counter (OTC): Trading and Security Types

By CHRIS B. MURPHY Updated December 20, 2023

Reviewed by GORDON SCOTT

Fact checked by YARILET PEREZ

What Is Over-the-Counter (OTC)?

Over-the-counter (OTC) is the process of trading securities via a broker-dealer network as opposed to on
a centralized exchange like the New York Stock Exchange.

Over-the-counter trading can involve stocks, bonds, and derivatives, which are financial contracts that
derive their value from an underlying asset such as a commodity.

When companies do not meet the requirements to list on a standard market exchange such as the NYSE,
their securities can be traded OTC but may still be subject to some regulation by the Securities and
Exchange Commission.

KEY TAKEAWAYS

Over-the-counter (OTC) securities are traded without being listed on an exchange.

Securities that are traded over-the-counter may be facilitated by a dealer or broker specializing in OTC
markets.

OTC trading helps promote equity and financial instruments that would otherwise be unavailable to
investors.

Companies with OTC shares may raise capital through the sale of stock.

Over the Counter

Investopedia / Laura Porter

Understanding Over-the-Counter (OTC)

Stocks that trade via OTC are commonly smaller companies that cannot meet the exchange listing
requirements of formal exchanges. Many other types of securities also trade OTC.

Stocks that trade on exchanges are called listed stocks, whereas stocks that trade via OTC are called
unlisted stocks.
Trade transactions can take place through OTC Markets Group's market tiers: the OTCQX; OTCQB; and
the Pink Open Market.

FINRA ran an OTC exchange known as the OTC Bulletin Board (OTCBB), but FINRA officially ceased
operations of the OTCBB on Nov. 8, 2021.

Types of OTC Securities

Stocks

The equities that trade via OTC are often small companies prohibited by the $295,000 cost to list on the
NYSE and up to $75,000 on Nasdaq. Some well-known large companies are listed on the OTC markets,
such as Allianz SE, BASF SE, Roche Holding Ag, and Danone SA.

Bonds

Bonds do not trade on a formal exchange but banks market them through broker-dealer networks and
they are also considered OTC securities.

Derivatives

Derivatives are private contracts arranged by a broker and can be exotic options, forwards, futures, or
other agreements whose value is based on that of an underlying asset, like a stock.

ADRs

American Depositary Receipts (ADRs), sometimes called ADSs or bank certificates that represent a
specified number of shares of a foreign stock.

Foreign Currency

Foreign currencies that trade on the Forex, an over-the-counter currency exchange.

Cryptocurrency

Cryptocurrencies, like Bitcoin and Ethereum trade on the OTC market.

OTC Markets

OTC Markets Group operates some of the most well-known networks, such as the OTCQX Best Market,
the OTCQB Venture Market, and the Pink Open Market. Although OTC networks are not formal
exchanges such as the NYSE, they still have eligibility requirements determined by the SEC.

OTCQX

The OTCQX does not list the stocks that sell for less than five dollars, known as penny stocks, shell
companies, or companies going through bankruptcy. The OTCQX includes only 4% of all OTC stocks
traded and requires the highest reporting standards and strictest oversight by the SEC.

It includes foreign companies that list on foreign exchanges and some U.S. companies that plan to list on
the NYSE or the Nasdaq in the future.

OTCQB

The OTCQB is often called the "venture market" with a concentration of developing companies that have
to report their financials to the SEC and submit to some oversight.

Pros and Cons of the OTC Market

Bonds, ADRs, and derivatives trade in the OTC marketplace, however, investors face greater risk when
investing in more speculative OTC securities. The filing requirements between listing platforms vary and
business financials may be hard to locate. Most financial advisors consider trading in OTC shares as a
speculative undertaking

Stocks trading OTC are not, generally, known for their large volume of trades. Lower share volume
means there may not be a ready buyer when it comes time to trade shares. Also, the spread between
the bid price and the asking price is usually larger as these stocks may make volatile moves on any
market or economic data.

The OTC marketplace is an alternative for small companies or those who do not want to list or cannot
list on the standard exchanges. Listing on a standard exchange is an expensive and time-consuming
process and outside the financial capabilities of many smaller companies. Companies may also find that
listing in the OTC market provides quick access to capital through the sale of shares.

Pros

OTC provides access to securities not available on standard exchanges such as bonds, ADRs, and
derivatives.

Fewer regulations on the OTC allows the entry of many companies who can not, or choose not to, list on
other exchanges.

Through the trade of low-cost, penny stock, speculative investors can earn significant returns.

Cons

OTC stocks have less trade liquidity due to low volume which leads to delays in finalizing the trade and
wide bid-ask spreads.

Less regulation leads to less available public information, the chance of outdated information, and the
possibility of fraud.

OTC stocks are prone to make volatile moves on the release of market and economic data.

Is the OTC Market Safe?

The OTC market is generally considered risky, with lenient reporting requirements and lower
transparency associated with these securities. Many stocks that trade OTC have a lower share price and
may be highly volatile. While some stocks in the OTC market are eventually listed on the major
exchanges, other OTC stocks fail. As with any investment, it is important to research the stocks and
companies as much as thoroughly as possible.

What Is an Example of an Over-the-Counter Market?

An over-the-counter market is a market where financial securities are traded through a broker-dealer
network as opposed to on a financial exchange. An over-the-counter market is not centralized and
occurs between two parties, such as a trade that occurs between two individuals that buy and sell a
share of a company that is not listed on an exchange. An over-the-counter market can consist of any
security, such as equities, commodities, and derivatives.

TABLE OF CONTENTS

STOCK TRADING STOCK TRADING STRATEGY & EDUCATION

Over-the-Counter (OTC): Trading and Security Types

By CHRIS B. MURPHY Updated December 20, 2023

Reviewed by GORDON SCOTT

Fact checked by YARILET PEREZ

What Is Over-the-Counter (OTC)?

Over-the-counter (OTC) is the process of trading securities via a broker-dealer network as opposed to on
a centralized exchange like the New York Stock Exchange.

Over-the-counter trading can involve stocks, bonds, and derivatives, which are financial contracts that
derive their value from an underlying asset such as a commodity.

When companies do not meet the requirements to list on a standard market exchange such as the NYSE,
their securities can be traded OTC but may still be subject to some regulation by the Securities and
Exchange Commission.

KEY TAKEAWAYS

Over-the-counter (OTC) securities are traded without being listed on an exchange.

Securities that are traded over-the-counter may be facilitated by a dealer or broker specializing in OTC
markets.

OTC trading helps promote equity and financial instruments that would otherwise be unavailable to
investors.

Companies with OTC shares may raise capital through the sale of stock.

Over the Counter

Investopedia / Laura Porter

Understanding Over-the-Counter (OTC)

Stocks that trade via OTC are commonly smaller companies that cannot meet the exchange listing
requirements of formal exchanges. Many other types of securities also trade OTC.

Stocks that trade on exchanges are called listed stocks, whereas stocks that trade via OTC are called
unlisted stocks.

Trade transactions can take place through OTC Markets Group's market tiers: the OTCQX; OTCQB; and
the Pink Open Market.

FINRA ran an OTC exchange known as the OTC Bulletin Board (OTCBB), but FINRA officially ceased
operations of the OTCBB on Nov. 8, 2021.

Types of OTC Securities

Stocks

The equities that trade via OTC are often small companies prohibited by the $295,000 cost to list on the
NYSE and up to $75,000 on Nasdaq. Some well-known large companies are listed on the OTC markets,
such as Allianz SE, BASF SE, Roche Holding Ag, and Danone SA.
Bonds

Bonds do not trade on a formal exchange but banks market them through broker-dealer networks and
they are also considered OTC securities.

Derivatives

Derivatives are private contracts arranged by a broker and can be exotic options, forwards, futures, or
other agreements whose value is based on that of an underlying asset, like a stock.

ADRs

American Depositary Receipts (ADRs), sometimes called ADSs or bank certificates that represent a
specified number of shares of a foreign stock.

Foreign Currency

Foreign currencies that trade on the Forex, an over-the-counter currency exchange.

Cryptocurrency

Cryptocurrencies, like Bitcoin and Ethereum trade on the OTC market.

OTC Markets

OTC Markets Group operates some of the most well-known networks, such as the OTCQX Best Market,
the OTCQB Venture Market, and the Pink Open Market. Although OTC networks are not formal
exchanges such as the NYSE, they still have eligibility requirements determined by the SEC.

1
OTCQX

The OTCQX does not list the stocks that sell for less than five dollars, known as penny stocks, shell
companies, or companies going through bankruptcy. The OTCQX includes only 4% of all OTC stocks
traded and requires the highest reporting standards and strictest oversight by the SEC.

It includes foreign companies that list on foreign exchanges and some U.S. companies that plan to list on
the NYSE or the Nasdaq in the future.

OTCQB

The OTCQB is often called the "venture market" with a concentration of developing companies that have
to report their financials to the SEC and submit to some oversight.

Pink Open Market

OTC Pink Open Market, formerly known as pink sheets, is the riskiest level of OTC trading with no
requirements to report financials or register with the Securities and Exchange Commission. Some
legitimate companies exist on the Pink Open Market, however, there are many shell companies and
companies with no actual business operations listed here.

Although Nasdaq operates as a dealer network, Nasdaq stocks are generally not classified as OTC
because Nasdaq is considered a stock exchange.

Pros and Cons of the OTC Market

Bonds, ADRs, and derivatives trade in the OTC marketplace, however, investors face greater risk when
investing in more speculative OTC securities. The filing requirements between listing platforms vary and
business financials may be hard to locate. Most financial advisors consider trading in OTC shares as a
speculative undertaking.

Stocks trading OTC are not, generally, known for their large volume of trades. Lower share volume
means there may not be a ready buyer when it comes time to trade shares. Also, the spread between
the bid price and the asking price is usually larger as these stocks may make volatile moves on any
market or economic data.

The OTC marketplace is an alternative for small companies or those who do not want to list or cannot
list on the standard exchanges. Listing on a standard exchange is an expensive and time-consuming
process and outside the financial capabilities of many smaller companies. Companies may also find that
listing in the OTC market provides quick access to capital through the sale of shares.

Pros

OTC provides access to securities not available on standard exchanges such as bonds, ADRs, and
derivatives.

Fewer regulations on the OTC allows the entry of many companies who can not, or choose not to, list on
other exchanges.

Through the trade of low-cost, penny stock, speculative investors can earn significant returns.

Cons

OTC stocks have less trade liquidity due to low volume which leads to delays in finalizing the trade and
wide bid-ask spreads.

Less regulation leads to less available public information, the chance of outdated information, and the
possibility of fraud.

OTC stocks are prone to make volatile moves on the release of market and economic data.

Is the OTC Market Safe?

The OTC market is generally considered risky, with lenient reporting requirements and lower
transparency associated with these securities. Many stocks that trade OTC have a lower share price and
may be highly volatile. While some stocks in the OTC market are eventually listed on the major
exchanges, other OTC stocks fail. As with any investment, it is important to research the stocks and
companies as much as thoroughly as possible.

What Is an Example of an Over-the-Counter Market?

An over-the-counter market is a market where financial securities are traded through a broker-dealer
network as opposed to on a financial exchange. An over-the-counter market is not centralized and
occurs between two parties, such as a trade that occurs between two individuals that buy and sell a
share of a company that is not listed on an exchange. An over-the-counter market can consist of any
security, such as equities, commodities, and derivatives.

How Do an Investor Buy a Security on the OTC Market?

To buy a security on the OTC market, identify the specific security to purchase and the amount to invest.
OTCQX is one of the largest and most well-respected marketplaces for OTC stocks. Most of the brokers
that sell exchange-listed securities also sell OTC securities and this can be done electronically on a
broker's platform or via a telephone.

What Is an Over-the-Counter Derivative?

An over-the-counter derivative is any derivative security that is traded in the OTC marketplace. A
derivative is financial security whose value is determined by an underlying asset, such as a stock or a
commodity. An owner of a derivative does not own the underlying asset but in the case of certain
derivatives, such as commodity futures, it is possible to take delivery of the physical asset after the
derivative contract expires. In addition to futures, other derivatives include forwards and swaps.

What Is Otcmkts?

Otcmkts, or OTC markets (over-the-counter markets), are markets where securities trade that are not
listed on major exchanges in the U.S. OTC securities trade instead through a broker-dealer network
often because they do not meet the requirements of the major exchanges.

The Bottom Line

Over-the-counter (OTC) is trading securities via a broker-dealer network as opposed to on a centralized
exchange like the New York Stock Exchange. Although OTC networks are not formal exchanges, they still
have eligibility requirements determined by the SEC. An investor can trade stocks, bonds, derivatives,
and foreign exchange currency on the OTC marketplace.

GUIDE TO FOREX TRADING STRATEGY & EDUCATION

Foreign Exchange Market: How It Works, History, and Pros and Cons

By AKHILESH GANTI Updated June 29, 2023

Reviewed by GORDON SCOTT

Fact checked by AMANDA BELLUCCO-CHATHAM

What Is the Foreign Exchange Market?

The foreign exchange market (also known as forex, FX, or the currencies market) is an over-the-counter
(OTC) global marketplace that determines the exchange rate for currencies around the world.
Participants in these markets can buy, sell, exchange, and speculate on the relative exchange rates of
various currency pairs.

Foreign exchange markets are made up of banks, forex dealers, commercial companies, central banks,
investment management firms, hedge funds, retail forex dealers, and investors.

The foreign exchange market is an over-the-counter (OTC) marketplace that determines the exchange
rate for global currencies.

It is, by far, the largest financial market in the world and is made up of a global network of financial
centers that transact 24 hours a day, closing only on the weekends.

Currencies are always traded in pairs, so the "value" of one of the currencies in that pair is relative to
the value of the other.

Understanding the Foreign Exchange Market

The foreign exchange market—also called forex, FX, or currency market—was one of the original
financial markets formed to bring structure to the burgeoning global economy. This asset class makes up
the largest financial market in the world in terms of the value of currency units being traded. Aside from
providing a venue for the buying, selling, exchanging, and speculation of currencies, the forex market
also enables currency conversion for international trade settlements and investments.
Currencies are always traded in pairs, so the "value" of one of the currencies in that pair is relative to
the value of the other. This determines how much of country A's currency country B can buy, and vice
versa. Establishing this relationship (price) for the global markets is the main function of the foreign
exchange market. This also greatly enhances liquidity in all other financial markets, which is key to
overall stability.

One of the most unique features of the forex market is that it's made up of a global network of financial
centers that transact 24 hours a day, closing only on the weekends. As one major forex hub closes,
another hub in a different part of the world remains open for business. This increases the liquidity
available in currency markets, which adds to its appeal as the largest asset class available to investors.

The most liquid trading pairs are, in descending order of liquidity:

EUR/USD

USD/JPY

GBP/USD

Forex Leverage

The leverage available in FX markets is one of the highest that traders and investors can find anywhere.
Leverage is a loan given to an investor by their broker. With this loan, investors can increase their trade
size, which could translate to greater profitability. A word of caution, though: losses are also amplified.

Forward Forex Market: The forward market involves an agreement between the buyer and seller to
exchange currencies at an agreed-upon price at a set date in the future. No exchange of actual
currencies takes place, just the value. The forward market is often used for hedging.

Futures Forex Market: The futures market is similar to the forward market, in that there is an agreed
price at an agreed date. The primary difference is that the futures market is regulated and happens on
an exchange. This removes the risk found in other markets. Futures are also used for hedging.

Advantages and Disadvantages of the Foreign Exchange Market

Advantages
There are fewer rules than in other markets, which means investors aren't held to the strict standards or
regulations found in other markets.

There are no clearing houses and no central bodies that oversee the forex market.

Most investors won't have to pay the traditional fees or commissions that they would on another
market.

Because the market is open 24 hours a day, you can trade at any time of day, which means there's no
cut-off time to be able to participate in the market.

Finally, if you're worried about risk and reward, you can get in and out whenever you want, and you can
buy as much currency as you can afford based on your account balance and your broker's rules for
leverage.

Disadvantages

Though the market being unregulated brings advantages, it also creates risks, as there is no significant
oversight that can ensure risk-free transactions.

Leverage can help magnify profits but can also lead to high losses. As there are no set limits on leverage,
investors stand to lose a tremendous amount of money if their trades move in the wrong direction.

Unlike stocks that can also provide returns through dividends and bonds through interest payments, FX
transactions solely rely on appreciation, meaning they have less residual returns than some other assets.

Lack of transparency in the FX market can harm a trader as they do not have full control over how their
trades are filled, may not get the best price, and may have a limited view of information, such as quotes.

The first true forex market was in Amsterdam, approximately 500 years ago. The exchange allowed
people to freely trade currencies to stabilize exchange rates. In 1875, the gold standard was
implemented, meaning countries were only allowed to print currency equal to the amount of their gold
reserves. Gold was the metal of choice due to it being rare, malleable, tough to corrode, and hard to
obtain.

In 1913, in London, there were 71 forex trading firms, an increase from three in 1903. But the gold
standard could not hold up during the world wars, due to countries having to print more money to
finance expenses.

After World War II, the Bretton Woods system was established. It called for most currencies to be
pegged to the U.S. dollar, which was backed by gold reserves.
In 1971, President Nixon announced a freeze on the dollar's convertibility to gold due to rising inflation
and a possible gold run. In 1973, the gold standard was completely abolished and the U.S. dollar was no
longer backed by gold reserves, and foreign exchange switched to a free-floating system. Currencies
were free to peg to any currency they chose or to remain unpegged and allow the supply and demand of
the currency to determine its value.

What Is the Importance of the Foreign Exchange Market?

Foreign exchange markets serve an important function in society and the global economy. They allow
for currency conversions, facilitating global trade (across borders), which can include investments, the
exchange of goods and services, and financial transactions