What Is Forex ?
Updated on 24 Feb 2020
Forex is one of those commonly-used terms which many of us don’t know the real meaning of. What you also need to know is the role it plays in your portfolio creation. Read on!
What is forex market?
Forex is an amalgamation of foreign currency and foreign exchange. The process of changing 1 currency into another for a plethora of reasons, mainly tourism, trading and commerce is known as foreign exchange. According to the Bank for International Settlements, the daily average of forex trading is $5.1 trillion, which makes forex exchange market the most liquid and largest asset market globally. If you combine all the stock markets in the world, the numbers will still not match this.
Simply put, the forex market is a global market where world currencies are exchanged. Investors invest in the forex market to hedge against world currencies, interest rate risks and to diversify their portfolios and so on. Individuals even participate to speculate about geopolitical events. The most unique fact about the forex market is that it has no central marketplace. It is conducted over the counter (OTC) electronically.
The Forex market is open five and a half days every week all day. The major centres are in London, Tokyo, New York, Frankfurt, Zurich, Singapore, Hong Kong, Sydney and Paris. The Forex market is extremely active all day and the price quotes change constantly. Investment and commercial banks conduct almost all the trading in the forex markets for investors, but there are other opportunities for individuals like speculative opportunities.
What is a forex exchange?
As discussed, foreign exchange is the conversion of one currency into another country’s currency. The value of currency of any free economy depends upon the laws of demand and supply. The value of a currency is fluctuating because most countries float the currency of their country freely against the currency of other countries. There are various factors that affect the value of an economy’s currency.
The first is market forces behind the trade, the second is investment, and then we have tourism, geo-political risks and so on. All of the foreign exchange transactions fall under the Bank of International Settlements (BIS).
Why should you trade in forex?
As an investor looking to invest in foreign exchange market, you should know why it will be beneficial for you.
You can easily earn profits from the changes in the exchange rate.
- The interest rate differential is a big earning point in foreign exchange market.
- You can trade even with a small capital in your account as there are several online brokers who offer high leverage to traders who are not multinational corporations or hedge funds.
- It is very easy to enter the market.
- Forex market is live 24 hours a day in most big cities in the world.
To get into forex trading, you need to have the knowledge about world economies and fundamentals that drive the value of a currency. However, with the help of a financial expert, you can easily invest in foreign exchange. Contact our financial experts at Kristal AI who understand the microeconomics behind a currency’s value and can technically analyze the market to make your investment profitable.
How can you invest in foreign currency markets?
There are 3 ways in which every institution, corporation and individual invests in forex, through –
- Spot market
- Forwards market
- Futures market
Spot market is the biggest market because the other two markets depend on it. With the start of electronic trading, the spot market witnessed a huge surge and surpassed the future market, which was previously preferred by investors and speculators. It is in the spot market that currencies are sold and bought based on their current value. It takes around two days for a trade to be settled.
The next two markets deal in contracts and not actual currencies. These are more future generic.
In the forwards market, over the counter contracts are bought and sold between two individuals or parties. They determine the terms of the agreement amongst them.
Futures market is very detail oriented. Contracts are traded on public commodities markets. Mostly, big hedge companies use forwards and futures market for trading foreign exchange. However, sometimes speculators also take part in forwards and futures markets as well.
What are the risks involved in forex trading?
Just like every other investment, there are certain risks attached to forex trading as well.
The banks have to make their own processes and accept credit risks to keep themselves safe. This can get confusing for an investor. As the price mechanism is based on demand and supply, it is difficult for new traders to influence the value of the currency.
Industry regulations are inconsistent around the world, which can be difficult to understand by the investor. Some small retailers are unregulated and they may trade against their customers, which is why it is important to choose brokers who are trustworthy.
To know more about these markets and stay safe while trading in forex, get in touch with our financial advisors. They will be able to help you determine the best market for you!
The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.