The foreign exchange market, also referred to as the forex market, is a decentralized global marker for trading currencies. Forex market is an over the counter (OTC) market. The forex market determines the foreign exchange rates. It involves selling, buying and exchanging currencies at the current market price. Forex market is the largest market in the world in terms of trade volume.
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SEE ALSO: Foreign Exchange Market
Below mentioned are the features of foreign exchange market:
Lower trading cost has enabled even small investors to earn good profits. Forex traders charge a minimal fee towards commission, unlike other investment options. The forex commission is restricted to the spread or the difference between buying and selling prices for a currency pair.
The foreign exchange market is open 24 hours from Monday to Friday. With a 24 hours market, you have more opportunities to execute trades. Foreign exchange market opens at Sunday 22:05 GMT and closes at Friday 21:50 GMT.
You can trade on margins which are technically on borrowed money in forex market. The value for your investment is high as the returns can be seen increasing exponentially. As forex market is highly volatile, you can suffer huge losses by trading with leverage (borrowed money) if the market works against you. Forex market is a double-edged sword. If the market plays in your favor, you make good profits. If the market plays against your bet, you suffer huge losses.
Foreign exchange market is a transparent market in which the traders have full access to market related data and information that are required to place successful transactions. With transparent markets, traders have good control over their investments and can decide on their further steps on the basis of information available.
You can access your forex market account from anywhere, provided you have an internet connection. You can trade from anywhere at any time. The accessibility enables forex market to score over other markets as it is convenient for the traders to place trade transactions at leisure.
Traders are free to buy and sell currencies of their own choice in forex market. This facility allows traders exchange currencies without affecting the prices of the currency pair being traded.
Types Of Foreign Exchange Market
Following are the types of foreign exchange market:
The transactions involving currency pairs in this market happen swiftly. Transactions made in spot market include instant payment at the present exchange rate which is also called as the ‘spot rate’. Spot market does not expose the traders to the volatility of the forex market which raises or lowers the price between the trade and agreement.
As the name suggests, transactions in future market involve future payment and future delivery at a previously agreed exchange rate, which is also called as the future rate. These deals and contracts are standardized which means that the elements of the deal or agreement are fixed and cannot be negotiated. Future market transactions are popular amongst those traders who perform large forex transactions and seek a steady return on their investments.
Forward market transactions work on the similar lines of future market. The major difference is that the terms are negotiable by the parties under forward market. The terms can be negotiated and tailored as per the needs of the parties involved in the agreement. Forward market allows flexibility.
SEE ALSO: Features Of Foreign Exchange Market
Following are the important points on foreign exchange market:
1) Transfer Function:
The most basic function of the forex market is to transfer purchasing power across countries. Forex market enables the conversion of one currency into another. The currency conversion is enabled through financial instruments like foreign bills of exchange, bank drafts, and telephonic transfers among others.
Forex market offers both national and international credits to promote foreign trades. The bill of exchange used in the international payments usually matures in three months.
In risky situations, the forex market operates as a hedge. Hedging is an act of equating assets and liabilities in foreign currency to avoid the risk due to future changes in the value of foreign currency.
The forex market works on the lines of Foreign Exchange Management Act, enacted in 1999 (FEMA) in India. FEMA was enacted to ‘consolidate and change the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India’. The structure of foreign exchange market is shown below:
Below mentioned are the advantages of foreign exchange market:
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