Forex trading is a profitable financial investment for both novice and expert traders alike. Due to its potential for high profits, forex trading has attracted many players. Furthermore, forex is the largest and most liquid financial market in the world.
However, forex trading can be daunting for a beginner. To participate in forex trading, you will need to understand what forex exchange is, the major players, and where you can trade forex.
What is Foreign Exchange?
Foreign exchange is the conversion of a country’s currency to another country’s currency. Foreign exchange is also referred to as the forex market or FX market. It is the global marketplace where traders exchange national currencies. The exchange consists of a network of sellers and buyers who exchange currencies at an agreed price.
The forex market is so large because it is a worldwide reach of commerce, trade, and finance. The foreign exchange market enables buying and selling of goods and services across borders.
Because of the large amounts of currencies converted daily, the price movements of the currencies can become highly volatile. The majority of forex traders seek to take advantage of these price movements and make a profit.
Where can you Trade Forex?
Forex trading takes place in a forex exchange market. However, unlike stocks or commodities, forex is not traded on a centralized market. Forex exchange takes place in an over-the-counter market (OTC) directly between the buyer and the seller.
A global network of commercial and investment banks runs the forex market. These banks are spread in different time zones and across major forex trading centers. Since there are no central exchanges, traders can buy and sell currencies 24 hours a day.
There are three types of forex markets:
1. Spot Forex Market
The spot forex market is the physical exchange of two currencies, and it takes place immediately after the trade is settled. It is referred to as the spot market because it takes place quickly, i.e., on the spot. The price of a spot forex market is known as a spot rate.
2. Forward Forex Market
A forward forex market is an agreement to buy or sell a specific amount of currency at a set price to be settled at a future date. A forward contract is not legally binding. However, traders can settle a forward contract within a range of future dates. The price of a forward forex market is known as a forward rate.
3. Future Forex Market
A future forex market is a contract to exchange a set amount of a specific currency at an agreed date and price in the future. The only difference between forwards and futures is that futures are legally binding.
Who are the Forex Market Players?
Because of its huge size, the forex market attracts a lot of players who seek to benefit in one way or the other. The major forex market players include:
1. Commercial and Investment Banks
The role of commercial and investment banks is critical in forex exchange. The main reason banks take part in forex exchange is to neutralize foreign exchange risks of their clients and that of their own. In addition, banks seek to increase the wealth of their shareholders.
2. Central Banks
Central banks have the predominant monetary authority in every nation, and they are under the government’s authority. Central banks facilitate the government’s monetary policies by making strategies to stabilize the value of their currencies. Central banks control the value of a currency by controlling its supply.
3. Business and Corporations
Businesses and corporations that trade in the forex market have no power to set currency prices. Most businesses buy and sell currencies at the prevailing exchange rate. However, such businesses and corporations make up a significant portion of the total volume traded. Most of these businesses participate in the forex exchange to buy and sell commodities across national borders.
4. Fund and Hedge Managers
Fund and hedge managers are basically national and transnational money managers. They, therefore, don’t play any role in determining or controlling the price of currencies. Fund managers are responsible to their investors; thus, their central role is to grow their portfolios and make profits.
5. Online Trading Platforms
Online platforms are critical impersonal parts of forex trading because they are the direct access points to the forex market. The platforms perform the task of customer and order matching. Since individuals cannot directly access the forex market, online platforms enable them to trade forex through the internet.
The forex market has become attractive to many traders and investors due to its potential for high profits. In addition, forex trading is simple and easy to get in, even for a beginner. However, forex is a high-risk investment, and every beginner should learn it before they start trading.