Forex trading means trading of currencies in the foreign exchange market. Foreign exchange is considered a market where financial institutions and banks facilitate people in selling and buying the foreign currencies. Forex market is the biggest financial market in the world. Traders involved in Forex trading are as follows:
- Large Banks
- Central Banks
- Corporations
- Governments
- Private financial institutions
- Currency speculators
The main purpose of foreign exchange market is to promote investment and trade between the countries. Forex trading is common due to the multifarious currencies like Dollar, Euro, and Pound Sterling etc. Foreign exchange market offers liquidity in the market. Foreign exchange market is working for 24 hours a day. This exchange market is near to the state called perfect competition.
The exchange rates are also known as Forex rates. Forex rates mean the value of one currency in the terms of other currency. In foreign exchange market there are two types of rates; one is spot exchange rate and the other is forward exchange rate. Spot exchange rate is the current rate where as the forward exchange rate is based on forecasting.
In foreign exchange market; you can analyze the demand supply curve in detail because in this market, one party is demanding a currency where as the other party is selling. In the foreign exchange market the most important thing is the mechanism of exchange rate. In a Financial system there are two major components and these are as follows:
- Money
- Foreign Exchange Market
Exchanges of money in foreign exchange market is usually made in banks deposit The trade in the exchange market takes place every day; dealers which are working in this market will help in buying and selling of the currencies. Business houses and many investors want to utilize the services of foreign exchange market in order to manage currency holdings. Foreign exchange market is different than the domestic markets; from domestic markets borrowers can get certain amount of money from the lenders subjected to interest rates. There are some factors which are affecting the exchange rates like “balance of payments” and political conditions.
Following are the advantages of foreign exchange market and it effects on the overall economy
- Encourages cross border transactions and trade.
- Encourage cross border investment.
- It increases the overall economic activity in the world.
- Foreign exchange market depends upon technology and increases efficiency in work.
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