Forex Market Trading
Forex Market Trading refers to trading foreign exchange, or in simpler terms, trading a country’s currency with that of another. Thus, a person buys a currency and pays for it with another. The main function of the forex market is to facilitate trade between different countries and boost investment.
There are numerous participants involved in forex market trading who exist at different levels. The most important ones are the central banks of a country, other banks, large corporate, brokers, money transferring firms, investment management companies and foreign exchange companies. More than 50% of the transactions are carried out by the large and smaller banks in the top level followed by big multi-national companies who have to pay for goods, services and employees in different countries and thereafter investment management firms controlling large amounts of money from its customer with which they buy foreign securities. Lastly, the retail participants consist of individuals who participate through the brokers or banks.
Forex Market Trading happens in an ‘Over-the-counter’ approach. Till now there is an absence of a single central platform where all parties can transact with all types of currencies simultaneously. What exists is a vast network connecting all the parties where different prices prevail on the basis of the place and the participants. London houses the main trading centre which is connected to the lesser but important centers of Hong Kong, Singapore, Tokyo, New York and the like through which Forex Market Trading happens 24X7.
In forex market trading, currencies are always traded against one another in currency pairs where the fist currency is known as the base currency being quoted against the second counter currency. Foe example, EUR/USD 1: 1.45371 means 1 Euro = 1.46 dollars.
The factors on which foreign exchange rates depend are varied in nature. These could be Economic, like long term trends, money supply, business cycle, etc or Political. Thus fluctuations result from factors such as inflation, GDP growth, and Purchasing Power parity, interest rates, large cross border business transactions, mergers or acquisitions or due to simple market psychology.
There exist various types of contracts through which transactions takes place in a forex market. Spot transactions are done in cash with 2 days delivery time as compared to future contract where delivery happens on a later date, usually 3 months. Swap contract on the other hand is the most common where two parties exchange currencies for a specific period of time and then agree to reverse the transaction later on.
Lastly, the ‘option’ is where an owner has the right to exchange an amount at a pre-decided rate and date though he may not be obliged to do so and the forex options trading market is the largest and most liquid market for options in the world.