Basics about forex trade and the foreign exchange market

By: Kavinesh_A

What is Forex Market?

The foreign exchange market is a vast marketplace where currencies are traded. Currencies and exchanging them with another currency hold prime importance around the world. Be it for travel, education, business or any other purpose, we need to relocate to a different country and need to exchange our currencies to the equivalent amount of local currency. As for example, if you are French on a tour to India, you can’t pay for food or conveyance in euros as they are not accepted. You need to seek help from a broker or an agent who exchanges your euros to the equivalent amount of Indian rupee that you can spend. The same theory is applicable all across the world. So, there are firms who provide a platform to the traders to buy or sell foreign currencies at the current exchange rates.  This is where Forex tirdzniecība comes into existence.

The foreign exchange market spans across the world and is the largest and most liquid financial market. It leads the financial markets with a huge volume of traded value worth trillions of US dollars on a daily basis. The astonishing part is that there is no central regulatory authority dominating the forex market. But, currency trading is done electronically via computer networks by forex traders worldwide. So, there are no centralized exchange but a stern network of brokers and traders operating through the electronic media. Unlike the stock market, the forex market is open 24 hours, five and a half days a week. The reason behind this is the time gap between the major foreign exchanges across the world. The exchange rates and price quotes fluctuate constantly depending on various factors.

Types of Forex Market 

The institutions, corporate and individuals trade forex in three ways, the spot market, forwards market and futures market. Usually, when people say they trade in the forex market it is actually the spot market where currencies are sold and bought according to the current exchange rates. The other two markets are preferred by the companies in need of hedging their foreign exchange risks to a future date. The spot market witnessed a surge in activity and demand after the electronic trading option became available to the individual traders.

Spot market

The spot market is generally known as the market in which transactions occur in present date and not in future. A “spot deal” is finalized between two parties when they agree upon a price for exchange of currencies. It usually takes two days time for settlement of the deal. The exchange rates differ from time to time based on several parameters like the world economy, business, politics, supply-demand ratio of currencies etc. Individual traders and investors prefer spot market over the futures and forwards markets.

Forwards and futures markets

The forwards and futures markets differ from the spot market as they do not trade real currencies. These markets deal in contracts representing claims to be settled on a future date. 

Contracts are traded over-the-counter between two parties in the forwards market. They determine the agreement terms and date of settlement between themselves. 

Futures contracts are traded in the futures market depending upon a particular size and the date of settlement.

Both the futures and forwards contracts are fixed that cannot be customized. The amount is settled in cash between the parties after the date of expiry. But they can be traded before the expiry date. The forwards and futures markets provide protection against risk while trading currencies. Apart from big corporate, speculators participate in these markets too.

Forex Brokers

Forex brokers are typically the firms that provide a platform for the traders to buy or sell currencies. They earn profits from the ask-bid spread in a currency pair. The forex brokers are backed by or associated with the top financial institutions, banks, investment management companies, hedge funds etc. The online platform they provide allows individual traders to buy, sell or exchange currencies electronically, five days a week.

If you are fond of Forex tirdzniecība looking for the best foreign exchange broker you should select based on the following parameters.

1. Benefits and services: You should look for the range of services the broker provides like how many currency pairs you can trade with. Many firms give superior leverage to their customers so you can manage larger positions with a tiny capital amount. Most trusted brokers give customized services expanding and altering their offerings to meet customer needs.

2. Multi-device support: As most traders consider forex trading as a second source of income so it is important that they can trade through any platform. Be it a desktop, a laptop or a handheld device, the brokers must assure uninterrupted services in every platform. Also, a sound and knowledgeable customer service team should be available 24x7 to handle customer inquiries.

3. Security: There are many risks in online trading and electronic transactions. So, the brokers should take prerequisite security measures to keep user data safe and secure. Traders’ money should be insured and safely deposited in a trusted bank.

4. Minimal rates: The brokerage rates and transaction charges should be low to provide maximum benefit to the trader. The trader must check if there is any loophole or hidden cost that is not clearly mentioned in the documents.

5. Training and support: A reliable forex broker should provide enough information about the current market trends and recommendations based on the same. They should intimate the traders about a possible fluctuation in exchange rates prior. Also, for the beginners, there should be enough material and tutorials to guide the trader to trade successfully.

6. Background check: Last but not the least, the background and history of the forex broker must be verified to avoid any risks. You must ask for opinions in the public forums or from expert traders before selecting a forex broker. A forex broker with several years of experience in the forex market with doubtless customer satisfaction is the best choice.

By Kavinesh

© 2017 Kavinesh - All Rights Reserved
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