Investing money in the stock market is still one of the most profitable and quick way of making a good deal of financial gains. Every business organization, for the purpose of generating capital, lists their company shares, equity as well as preferential, on the stock exchange. Investors, such as individuals and other business firms invest a sum of money to buy these listed shares.
Just like in the stock market where trading of stocks and shares takes place, the buying and selling in terms of foreign currency is performed in the foreign exchange or Forex market. It is in the forex market where the rate of any particular foreign exchange is determined depending upon several factors.
Forex market is, at present, one of the principal market functioning worldwide. International banks and other financial institutions are some of the major participants of the forex market. The forex market actively functions five days in a week, except on weekends. In case of foreign currencies, they are traded in the forex market in pairs. One currency’s market price is determined by the other one.
How does the Forex Market function?
Banks are the most active participants in the Forex Market; large scale banks depends to some level on local banks who acts as dealers. This process is known as interbank market and at times even insurance firms are also inculded in such dealings. Unlike the stock market, foreign exchange trades are quite large in terms of the currency involved.
Autonomy issues is responsible for the fact that there is no regulating entity for governing the actions of the foreign exchange market. The currency conversion undertaken by the forex market helps in assiting the trade and investments that takes place worldwide. Functioning of the foreign exchange market determines the international trade relations between various countries.
The basic transaction that happens on the forex market comprises of exchange of two different currencies wherein one party or firm purchases a specific currency and in return makes the payment in some other currency. After significant policy changes the government bodies have now started to take control over the functioning of the foreign exchange market. With the introduction of Bretton Woods system all the countris have started to follow floating exchange rate system.
Basic features which makes forex market different from others :-
There are some specific features associated with the Forex market that makes it one of the most profitable market for investment all across the world. These features are mentioned as follows :-
- Geographical diffusion of foreign exchange market allows for easy accessibility for trading prupose to potential investors.
- The forex market is active for 24 hours and functions five days a week but not weekends.
- Foreign exchange market deals in large volume of foreign currencies and offers high liquidity to the investors.
- There are several economic or market factors that have direct impact on the foreign exchange rates.
- Investors can use leverages in order to increase the overall profit margins related to the transaction.
Types of transactions taking place in a Forex Market :-
The Forex market includes different types of transactions which brings profit for the investors. However, each of these transactions are surrounded by various risk factors as well which, if not taken care of, can result in the investors facing serious loss on the transaction. Some of the important transactions in the forex market are as follows :-
- Spot Transactions :- The foreign exchange dealings which gets processed immedaitely, say within two to three working days, are known as spot transactions. It is to be noted that the working days does not include weekends and festive holidays. A specified settlement date is mentioned on which the funds have to be exchanged. In case of short term transactions there are various speculations which drives the market.
- Forward Transactions :- A forward transations is takes place on any date which comes after the spot date. Spot rate needs to be adjusted so to calculate the price. The adjusted amount is termed as forward points. These points are used for the purpose of reflecting difference in the interest rates that exist in two different markets. The contract in case of forward transactions are tailor-made.
- Future Transactions :- Transactions , the payments for which, are scheduled to be done on a specific date, that is longer in comparison ot the spot date, are known as Future transactions. All the future transactions gets traded on the forex exchange. Depending upon the changes that occurs in the market value the buyer makes the payment. Brokers, such as speculators, are very much interested in future transactions.
Who are the participants in the Forex market?
The Forex market is comprised of different participants that are active in undertaking various kinds of transactions or dealings pertaining to foreign exchange reserves. Basic participants who are indulged in the Forex Market are mentioned below :-
- Commercial or profit-making companies :- All the financial activities undertaken by commercial firms contributes to the total foreign exchange of any economy. These companies are in need for foreign currencies in order to make payments for several services and goods purchased by them. The total amount of transactions in case of profit-making companies are comparatively smaller in quantity.
- Central Banking institution :- Centralized banks are the major participants in the forex market. Large amount of foreign reserves gets exchanged through these central banking institutions. They play an important role in fixing the appropriate exchnage rates in the market.
- Investment firms :- Firms who are in the busienss of managing accounts of their clients that are large in size takes active participation in the forex market. These clients comprises of several international business organizations who needs foreign reserves to make and receive payments.
- Traders in forex market :- Majority of the working in the forex market are performed by the traders, agents and brokers who deals in the foreign exchange market.
Before moving forward with making investments in the forex market make sure to gather all the relevant information and understand well the rules and policies as specified by the governing bodies.