The infopedia about Forex market

What does one mean by Forex Market?

Otherwise known as FX, Forex Market is the market of currencies where a number of denominations of currencies are traded and exchanged as per certain norms and conditions. It is the market where dealers can buy, sell and transact with money. Currently it is the largest and most liquid market of the world with transactions worth of trillions of dollars conducted every day. It is formed by investment firms, public and private banks, brokers, investors and commercial companies. It is a 24×7 market that runs always throughout the year and has transactions in indirect form on the weekends. The Forex Market is formed of two levels, Interbank Market where the banks play the key role in conducting a transaction for their clients and OTC Market where a private individual conducts the trading process via firms and third party medium. This article deals with all the technicalities of a Forex Market.

Modes of transactions in FX

Forex Market conducts transactions mainly on the following two bases: –

  • Spot Transactions- These transactions are the fastest ones and have a quick delivery, generally within two business days of any currency pair. However, during weekends or any major holiday, the spot deals take time as long as a week to get processed. The funds are exchanged on a settlement date, not on transaction date.
  • Forward Transactions- Any transaction whose duration is more than that of spot transaction is known as a forward transaction. The spot rate is calculated to tabulate the difference in interest rates of two currencies and it is used to formulate some adjustments named forward points. These transactions can be made only on non-weekend days and non-holidays and moreover, transactions of maturities greater than a year can be easily processed via forward transactions.

Advantages of Forex Market

Forex is a self-dependent market where one has full liberty to control his or her future without any sort of restrictions. It ensures a smooth transaction in the market and sets a formal set of rules and regulations that benefit both of the parties. The credibility of Forex Market can be determined by its following assets and upper edge: –

  • The market runs every day throughout the year and remains busy always due to a large number of customers from all over the world like institutions, banks and private individuals. As the market is present on every part of the world, hence there is no fixed working hours in the market. This business also helps the private individuals to invest effectively and easily in the market without having any form of hindrances.
  • The market never foes in any form of depression and hence investors can earn more than the expected sum irrespective of the global scenario. It holds an upper edge over other markets in terms of the art of making profits even out of losses and surpassing all forms of financial crisis and depression. This aspect is often coined as multi-directional trading.
  • The additional costs in any transaction is almost zero in a Forex market and hence one can avail all of the facilities in only the invested or cost capital. In addition to that, Forex Market also has low initial deposit range, so that there is no barrier on the minimum balance to be maintained by any client in the market. All forms of softwares and tools used in the market are nearly free and do not require any additional cost to be payed, unlike the third party media who take commissions for finalising any form of financial deal.
  • Forex has a huge liquidity in terms of the maximum leverage that it provides and hence helps in attracting investors easily into the market. It ensures a secured trade and huge profit even from a very small initial deposit.
  • Forex is present literally in all parts of the world and hence it eases international transactions where one can open an account easily in any foreign country and have a hassle free transaction.
  • The market has a huge flexibility in its rules and regulations and can surpass any unnecessary rule set by the foreign policy of a nation easily and hence attracts a large number of customers.

The major drawbacks

However glittery may the domain of Forex Market seems, it has a few shortcomings as: –

  • The market is not a safe haven for a newbie investor who is not well aware about the technicalities of the market. It poses a high number of risks which need to be tackled with effective solutions.
  • Due to decentralization of the market, it creates a confusion regarding the implementation of some pivotal rules that are set by the governing body of a nation to have a successful base for the Forex market.

Determining the exchange rates

The exchange rates in a Forex Market can be determined via the following economic models: –

  • International Parity Conditions, where dealings of goods, services and capitals are done according to the norms set by the financial ministry of the government of a nation.
  • Balance of payments Model, which focuses majorly on physical tradability goods and services.
  • Asset Market Model, where currencies are the vital assets for any investment profile. It clearly states that the exchange rate between two currencies is just balance of the relative supplies and demand of the assets in those currencies.

The final conclusion

This article details briefly about the concept of Forex Market and how is it running so well and beating a number of major global markets. It also states clearly the modes of transactions that one can have in the market along with the advantages and lacunae of each. It also details about the advantages of the environment set by the Forex market and the drawbacks hidden within some of the advantages. Hence on the basis of the analysis and deep understanding, one can decide easily regarding investment in the Forex market and how it can impact their financial ground.

Mike John
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