Forex is the market place where the exchange of currencies takes place. In a foreign exchange market one currency is traded for the currency of another country.
- The fixed exchange rate of the currency also known as the pegged exchange rate is determined by the government, where the value of the currency is pegged to the currency of another country.
- The floating exchange rate of the currency is the fluctuations in the exchange rate which will be determined by several factors contributing to the balance of trade and the economy of the country.
A typical forex trade involves the purchase of one currency by paying for it in another currency. For instance, before you travel to the US you purchase US dollars by paying for its value equivalent in the required units of currency of your country.
The main purpose of the Forex market is to enable international trade and investment. This became important due to the difference in the values of the currencies of each country in accordance with the balance of trade of the economies of nations, which in turn contributes to the values allotted for the currency of that particular country’s currency.
Participants in Forex Market
The FX market is the biggest liquid money market in the current day world. Forex transactions happen between big banks, central banks of countries, currency traders, between governments, corporations and other institutions.
The Forex market:
Has biggest trading volumes and extreme liquidity in the financial market.
- Is a global market and it is not confined to just one geographical region
- Operates 24 hours a day other than on weekends.
- Is influenced by several fundamental and technical happenings in the world.
- Gives low margins of profits but high profits can be made by trading increased volumes.
- Uses leverage in its operations.
What differentiates stock market from the forex market?
In a stock market, all traders are presented with the same price, but in a Forex market, there is a restriction in the accessibility of actual prices being traded based on the levels of the participant.
Differences in PIPS in the Forex Market
The pips of the forex transactions are very sharp and it is usually not available to the rest of the market. The Interbank gets the best spread in the market due to the biggest guarantee of transactions they can vouch for.
Traders making huge transactions are likely to get a better spread than those who exchange a few units of currencies.
The levels of spread values provided in the forex market differs between Banks, Commercial companies, Central banks, Hedge Funds speculators, Investment management firms, Retail foreign exchange brokers, and Non-bank foreign exchange companies.
Factors Influencing Forex Rates
The Forex market is influenced by international parity conditions, balance of payments, asset marketing trends, balance of trade and overall economic factors of the country, and market psychology of the traders involved in the trading platform.
Financial Instruments in Forex Trade
The kind of contracts used in Forex trading is spot contract, forward contract, future contract, swap contract, option contract, exchange traded fund contracts etcetera.
Apart from the above stated issues devaluation of currencies and devaluations of national economies also play a major role in the trends in forex markets.
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