By Zack Devin
Forex, which got its name from the blend of foreign and exchange words, is often referred to as a foreign exchange of international currencies and currency derivatives. It is a global e-platform for trading currencies worldwide. It does not have any physical headquarters, yet the forex market is a major player in the exchange business regarding the voluminous trade of money and ease of buying and selling.
Working of this Market
This market has pre-decided rates of each currency relative to other one based on the latest stock trends, thereby ruling out the absolute price fixation of each currency. It operates for the entire 24 hours, for each day except Saturday and Sunday or a national/public holiday. Earlier majority of such trading was done through public and private banks, brokers, Government bodies, big financial institutions, and stakeholders. Still, now even individuals have the permit to buy and sell currencies on it directly. The entire trading is done to exchange currencies online, not in cash, and brokers switch positions generally at the end of each trading day.
Currency exchange in Forex market
As we all know, currency exchange is a vital part of the smooth functioning of the global economy and financial bodies since all countries are interdependent. Therefore, the exchange of currencies is essential. For example, Samsung is an Electronics company that assembles one of its smartphones in India. Still, those parts are imported from different countries, thereby causing an exchange of electronic raw material and currency exchange. So, in that case, reverting the concerned suppliers with the share of the profit earned by Samsung would require thousands of foreign currency exchanges for a sole product. Thus, we need to have a universal currency standard that eases our workload and currency exchange process.
Merits of exchange
Let us further explore the merits of the exchange –
- Liquidity– With trillions of daily market turnover, there is no scope for questioning its liquidity. In reality, every trader has the privilege of entering into and moving out of this exchange as and when required at very low costs. Also, since trading involves many different ladders and organizations, the exchange markets are protected against market manipulation because it has a huge size. Individual traders can hardly influence the market or profit from evil actions.
- Simplicity– Currencies are often traded in pairs with a tight negative correlation where one currency automatically increases in monetary terms if the other decreases. This exchange has this big simplicity factor. There are thousands of equities for each pair of currencies. To be carefully confident in single equity requires keen interest, devotion, and constant vigilance with proper observation skills.
- Convenience– Next is the aspect of convenience. Since the currencies trade on different exchange platforms worldwide, unlike those limited to a specific currency within a fixed geographical area, it is possible to trade 24 hours a day, six days a week. With different time zones across the world, it becomes convenient for traders and brokers.
- Commission Free– Finally, it has the benefit of being commission-free. Speaking, there are no transaction fees charged during an exchange of currencies. Instead of making money from trade commissions, brokers earn huge profits from the evident gaps between the cost price and its sale price when it is later sold, unlike the stock market, where there is least or negligible scope for commissions. Most of us must have realized the exorbitant spreads of 5%–10% charged by foreign exchange traders at airports or any such place.
Thus, Forex is a unique standard exchange market for currencies and has its own set of advantages. But we should not neglect its demerits of being complex and volatile, and highly competitive for individual traders. In short, it is by far the biggest financial marketplace that facilitates foreign trades and boosts the global economy at very low exchange costs.
