When we enter the financial market to trade forex money, we have three options: equity market, commodity market, and currency market. The currency market is also known as Forex or foreign exchange. As the name suggests, the role of the currency market is to determine the foreign exchange rate for every currency or, basically, the trading of currency. This market is humongous. It’s so grand that the amount Bombay stock exchange trades in one month, currency market trades in a day. It is the largest market in the world. The reason for this market becoming the apex is that all the countries, governments, commercial banks, corporations, and most of the population indulge in this market.
Need for the forex market
This makes the Forex market the most liquid financial market in the world. Joining this market is a piece of cake for most, as it doesn’t require much capital to get in this. Now the question might arise in your mind: how is participation in this market so damn easy? Simple, every time someone visits a foreign country and upon entering there, he/she exchanges his/her native currency with that country’s native country, he’s participating in the Forex Currency market. Suppose you went to America, you need dollars there, so you need to convert your rupees into dollars. And the moment you do so, you’re a part of the currency market now. The currency market isn’t new. It started in ancient times when money changers started changing people’s money and started charging commissions.
How is trading in forex done?
Ever wondered who started stating rupees as INR, US dollar as USD, the Australian dollar as AUD, British pound as GBP and euro as EUR, etc. Right, the Forex market. This is how they symbolize different currencies. The currency in the Forex trades in pairs. This means there is always an involvement of two currencies. When we exchange rupees for dollars, there is the involvement of two currencies, the dollar and the rupee. Also, you’ve heard that these many rupees are equal to this much dollar, or pound, or dinar. This is the market price. Another question arises here. How are the exchange rates determined? Fixed rates are decided by the government, but floating exchange rates can be fluctuated by some things like International parity conditions, asset market model, the balance of payment model, etc.
Let’s discuss how trading in Forex is done. It is done initially by creating a forex demo account. It’s done in an off-exchange mode, where trading is done directly between two parties. Don’t confuse this with exchange trading. Exchange keeping is done in the exchange market, not in off-exchange. The biggest trading centre is in the United Kingdom, London.
Where there is trading, there are certainly some risks involved. Risk in the value of the currency, profit and loss risk in case of currency swaps, nonfulfillment of agreement regarding outstanding currency position ( this risk is for banks ), liquidity risk, marginal or leverage risk, transactional risk, risk of ruin, etc. So while trading in these markets, make sure that you’re aware of all the risks involved so that you don’t be the one who has to face any adversity or whose back is against the wall.