Guest Author: Why the Foreign Currency Exchange Matters to the Global Economy

By: Sumit Narula

Forex is the amalgamation of two terms: FOReign + Exchange. It is the sale and purchase of currencies in the global market. This form of trading is similar stock trading, which allows an investor to sell and purchase shares in a company. However, in Forex, the investor does not directly receive the possession of the money; instead, he earns profits from the currency value on the basis of the exchange rates in the dynamically changing currency trade. This means that the Forex market determines the value of floating exchange rates.
The Forex market is the spine of global trade and investing. Because of this, it is important to keep exports and imports running continuously. Doing so activates access to resources that create additional needs for goods and services. If there is no ability to trade in various currencies, the global economy would face serious consequences due to limited prospects. These consequences are avoided through Forex trading. Forex occurs bilaterally through electronic means. Since the global market relies on the currency exchange rates, Forex cements the bond of the global network. More countries are currently opting for flexible rates of exchange that allow gradual and natural movements. This is in response to the drawback of fixed rates of exchange which let pressure develop, causing complications for investors. When the market attempts to overcome the pressure, it switches to a flexible exchange rate so the trading can happen dynamically. This process is the standard developmental progress for emerging market currencies, making them key players in the global economy.

The Features of Forex Trading

The Forex market can provide maximum liquidity to traders because, of all the financial marketplaces, Forex is the largest. Daily Forex trading usually exceeds 4 Trillion US Dollars, more than 1.5 Trillion of which is traded in the form of spot-trading (the trading of currency, which makes Forex trading possible). The most common spot trading in Forex is called “Contract To Trade.” Contract to Trade enables the trade of particular amounts of two paired currencies to meet an advertised selling or buying price, called the spot rate. In this type of trading, high volatility usually signifies a higher risk potential. Unlike other markets, Forex trading functions 24 hours a day, five days a week. Overlapping time zones normally result in the highest liquidity, but only during the market’s open hours. During this time, it is crucial for traders to understand the relationship between market functioning and market liquidity. Knowing this relationship will help investors make better trades. In the Forex market, short selling (the sale of a currency pair difference before purchase) is an easy viable option to make a profit. However, for an investor to earn profit on a short-sale, he must buy the derivative currency for a lesser amount than when he sold it. Whether an investor gains a profit or incurs a loss on a short sale is determined by the difference between the purchase price and selling price. If an investor expresses plans to engage in a short-sale, it could suggest to other investors that there is a possibility for a buyer to make a profit, but this depends on a raise in the future value of the currency in the Forex market. Like many other markets, Forex has its own trading cost: a spread, which is the remainder of the asking price and the bidding price. In the Forex trading market, the spread has a tendency to be diminutive compared to the spreads of other securities like stocks. That makes over-the-counter Forex trading the cost-effective instrument of Forex’s investment trade. Over-the-counter trading is the trading of securities in a context that is not a formal exchange (an example of a formal exchange would be the New York Stock Exchange). Most over-the-counter Forex trade brokers propose what is called Margin-Based accounts to Forex traders because it is different from accounts that are credit-based. These forms of accounts are similar to bank accounts, as their purpose is to store money for the purchase of trades in the Forex market In order to trade using a Margin-Based account, a trader must first create a Margin-Based account with an agent or broker. Following this, they must depositing money into the account. Once this is completed, the investor can get involved in the trading activity of their choice as long as the account has adequate funds present in it. Even though Forex has many positive attributes, there are still negatives to this mode of investment. Though there is strong potential for bountiful returns in Forex, it is still possible to incur rapid losses. For this reason, some brokers strongly recommend purchasing insurance against the investment. When prices begin to hike, an investor can make a profit through selling the currency for the higher price, thus earning a profit. When the prices are declining, however, there is still a small chance of making said profit through selling the derivative currency pair and later possibly buying it for a smaller price. Author Bio Sumit Narula works with Policy Bazaar, an online insurance aggregator. The company offers an online platform that facilitates insurancy policy purchasing by individuals. Policy Bazaar matches the best price to the individual searching for insurance.

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