What Is Foreign Exchange (Forex)?
Forex stands for foreign exchange. It is a decentralized international market for free trade of currencies. In other words, it is the market where you can buy or sell international currencies for different reasons. It is called as decentralized because unlike other financial markets, Forex market has no physical location and no central exchange. Which means this market operates electronically via online portals across the countries. Here traders exchanges one currency with another at the prevailing exchange rate. For instance : If a trader wants to exchange Indian Rupees with US dollars, he will get this done using the forex market.
The forex market is one of the largest financial market in the world, where a big volume of currency (Over $4 trillion) exchanges every day. US dollar is one of the main currencies used for forex trading.
Who Are Traders Of Forex Market?
There are many different players in the currency market who trades for different reasons. Some trades for generating profits with changing price quote (exchange rate), other trade to hedge risk and some needs foreign currency for buying goods and services. Forex market traders includes :-
- Importers & Exporters
- Brokers and dealers
- Financial Institutions
- International corporations
- Individuals etc..
When Is The Forex Market Open For Trading?
Unlike other financial markets, Forex market has no physical location and no central exchange. Which means this market operates electronically via online portals across the countries. Which makes this worldwide currency exchange operate on 24-hour basis, five days a week. This makes forex market extremely active any time of the day, with price quotes (rate of exchange) changes constantly.
What Is Currency Exchange Rate? Factors Which Influence Currency Exchange Rate?
Currency exchange rate (also known as the foreign exchange rate, Forex rate or FX rate) is the rate at which one currency will be exchanged for another in the forex market.
Like other markets, demand and supply also rules on forex market :-
- Price increases when buyers exceed sellers
- Price decreases when sellers exceed buyers
Other than demand and supply, the other factors which influence exchange rates are:-
- National economic performance
- Central bank policy (RBI in India)
- Interest rates
- Trade balances – imports and exports
- Political factors – such as elections and policy changes
- Market sentiment – expectations and rumours
- Unforeseen events – terrorism and natural disasters
How Can You Make Money With Currency Trading?
Buying at lower rate and selling at higher rate is the base of making money in Forex. For example If you buy INR against USD when each INR is equal to $0.021903 USD and then sell it when it is $1.021903 USD, you have made a profit.
What Are The Key Features Or Advantages Of Forex Market?
- The most traded financial market in the world.
- No centralized market place – The online market makes it work 24 hours a day.
- Currencies traded over the counter in whatever market is open at that time
- Trade 24 hours a day, 5 days a week
- Brokerage commissions is very low
Spot Market and Future Market
Different ways that institutions, corporations and individuals trade forex:
The Spot Market
The spot market is also called the “cash market” or “physical market”, it is public financial market where financial instruments and commodities are bought and sold for cash and delivered immediately. The spot foreign exchange market gives a two-day delivery period, originally due to the time it would take to move cash from one bank to another. Online trading platform is one of the another platform for spot transactions for retail forex trading where currencies are bought and sold according to the current price.
The Forwards Market
Forward market is the financial market where two parties comes under a personalized contract that represent claims to a certain currency type, a specific price per unit and a future date for settlement. In simple words, forward contracts are contracts between buyers and sellers where they agrees to take future delivery on a price agreed upon today.
In this type of transactions, money does not actually moves physically until some agreed upon future date. Once the future date as per the contract approaches, the transaction occurs between the buyer and the seller on the agreed upon rate regardless of the current market rate. Here for an example, if A comes under contract with B at an exchange rate of Rs 50 for 100 units after one month then at the end of one month A and B have to make the exchange at an agreed price of Rs 50 for 100 units regardless of the market price.
The duration of the trade can be one day, a few days, months or an years. Usually the date is decided by both the parties.
Future contract consist of specific details like the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement.
The most important reason of conducting future contract is the protection against risk while trading in the financial market. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.