Most people interested in trade and marketing know the portmanteau Forex. It comes from the word foreign currency and exchange. As the name suggests, forex is an exchange of a currency for another for different reasons. These reasons vary like tourism, trading, and commerce. People trade currencies in pairs. In the stock market, the investments are bought and sold in a single stock. In the forex market, the investor has to sell an equivalent amount of a currency to buy another currency. It is the simple forex market rule to follow.
Key points to the beginners
Forex is an international market for the exchange of currencies. This global marketplace is one of the largest asset markets now. It has a considerable reach in finance, commerce and trade. As mentioned above, transactions here are done in pairs. These pairs are called rate pairs.
For example- INR/EUR is a rate pair for trading Indian rupees against the euro.
Forex is considered as a spot market and a derivatives market together. There are options like currency swaps, futures, forwards, and options. Investors use forex against interest rate risk. It is also helpful to know diversified portfolios and geopolitical events. There are many more advantages to it.
Things to know about the forex market
The best place to trade currencies is in the foreign exchange market. There are no options other than currencies to purchase goods and services locally and internationally. There is no way to handle foreign business and trade other than exchanging currencies with another currency.
For example, if a person lives in India and wants to buy a burger from Australia, changing the Indian rupees to the Australian dollar is mandatory. An equivalent of the Indian rupees will be given in Australian dollars to pay for the burger.
It is applicable in traveling too. If a person from Australia travels to France, it is mandatory to convert the currency from Australian dollar to euros to visit the places and do some shopping.
The uniqueness of forex is its decentralized marketplace. The currency trading and exchange are conducted by machine over the counter (OTC). Since there is no centralized exchange, everything occurs through computer networks worldwide. It works almost in all time zones worldwide. The major financial centers are Sydney, Singapore, Frankfurt, Tokyo, Paris, New York, Hong Kong, Zurich, and London. Currencies are traded twenty-four hours for five and a half days. Since it works in every time zone, while it closes in the U.S., it’s opened in Hong Kong and Tokyo. It makes the market open worldwide constantly and active all the time.
Why is trading currencies possible?
Before the invention of the internet, individual investors found it difficult to trade currencies. They were done mainly by investors from hedge funds, multinational corporations, or investors with high net worth. Investors faced this difficulty because, during that time, foreign exchange required a tremendous amount of capital. The internet has made everything easy now. Anyone with a small account balance can trade now. A secondary market and a retail market are formed for the easy access of investors.
As mentioned above, forex is the solution for investors with small capital. Read and focus more on macroeconomic fundamentals to know how profitable is trading currencies.